4 ms·

The idea that executives have a duty to maximize shareholder value is a trope from business ethics class, not law. I say this because you used the phrase "fidu

by duped 1y ago

The idea that executives have a duty to maximize shareholder value is a trope from business ethics class, not law. I say this because you used the phrase "fiduciary duty" which does not exist in this context.

sorcerer-mar 1y ago
Correct, because GP said “legal obligation," which I agree: there isn't one.
- klik99 1y ago
  Genuine question because I think I might be wrong on this one, or maybe misunderstanding what you're saying - aren't there cases of shareholders suing CEOs for not acting in shareholders interest and winning? If there was no legal obligation to act on behalf of shareholders how could they win those cases? My understanding is those kind of cases aren't common because a) they are hard to prove, b) the people being sued if they actually have the money to make it worth suing them also have the money to fight it, and c) it's a really bad look for an investor to be suing a previous member of their portfolio and would a strong adverse affect on their deal flow Unless you're saying there is no explicit legal obligation / fiduciary duty in law, but it does emerge from civil court cases, which is how I understand it, but short paragraphs are not a good place for the amount of nuance so I just said "legal obligation" as a shorthand for something real but very complex.
  - duped 1y ago
    I think Matt Levine coined this phrase: "everything is securities fraud." Activist investors will sue for anything alleging that executives broke securities law by doing anything that harmed their portfolio. It doesn't mean they win the cases, or that anyone is guilty. There's also something worth noting that even if there isn't a legal obligation for executives to act on their shareholders interests, they have a really strong incentive when their compensation is mostly stock grants and the shareholders can fire them.
  - sorcerer-mar 1y ago
    As far as I know, no there has not been a CEO successfully sued in the US for failing to maximize shareholder value.
    - deleted 1y ago
      [deleted]
    - airstrike 1y ago
      Board not CEO but see https://en.wikipedia.org/wiki/Revlon_duties https://en.wikipedia.org/wiki/Revlon_duties For CEO see https://www.rgrdlaw.com/cases-in-re-dole-food-co-inc-stockholder-litig.html https://www.rgrdlaw.com/cases-in-re-dole-food-co-inc-stockho...
      - cycomanic 1y ago
        The first paragraph from the first source: > The Court declared that, in certain limited circumstances indicating that the "sale" or "break-up" of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available. Seems to imply that under normal operation (i.e. no inevitable break-up) the fiduciary obligations are quite different though?
        airstrike 1y ago
        Yes, under normal circumstances, the "business judgment rule" applies which is much more favorable to boards. Satisfying it requires only that directors: - act in good faith; - act in the best interests of the corporation; - act on an informed basis; - not be wasteful; - not involve self-interest (duty of loyalty concept plays a role here). https://en.wikipedia.org/wiki/Business_judgment_rule#Standard_of_review https://en.wikipedia.org/wiki/Business_judgment_rule#Standar...
lucas_membrane 1y ago
> from business ethics class, not law Well, there was one case in the law over 100 years ago in the USA. A company had decided to sell itself for cash and go out of business. The Court ruled, that in that situation, it should sell to the highest bidder. This is long before Milton Friedman began advocating that corporations had a duty to their common shareholders that provided the only valid yardstick for evaluating corporate activities. Friedman was an economist, and a controversial one, not a lawyer, and how he got the lawyers behind him is itself a long strange story. The idea that common shareholders own the corporation was not really obvious to anyone from the start. Common shareholders get from the corporation only what is their privilege according to the corporate bylaws and charter. There are now, and have been in the past, many different kinds of and classes of common shareholders. For example, some big corporations today have many common shareholders who do not have any voting rights. The thing that sets common shareholders apart from the other stakeholders who also hold pieces of paper from the corporation granting them various interests in the corporation, is that the common shareholders get to divide up whatever is left over if and when the corporation is liquidated and everyone else is given what they are owed first. They are more heirs than owners. It is more realistic to hold that the corporation, as an artificial person, is not and cannot be owned by other persons, and owns itself.
- singleshot_ 1y ago
  I am repeatedly entertained by the phenomenon of someone who reads a case, bothers to remember it, thinks it's important, describes it, but does not provide a citation. Friedman deeply misunderstands agency law. Saying he got the lawyers behind him is misleading, because there are any corporate fiduciary duties owed by directors or officers to the shareholder other than 1) act informed 2) do not usurp corporate opportunity.
- trollbridge 1y ago
  It’s incredible how many people don’t understand this. Google is an obvious example that has multiple classes of stock and only some are voting shares. There is the “shareholder lawsuit” but that really is about enforcing a company’s stated goals to its shareholders, which can and often are things other than “try to make the stock price go up as much as possible”.
MangoToupe 1y ago
https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co. This is not statute, but it remains legally binding in Delaware so long as the courts uphold it.
- lesuorac 1y ago
  It's not legally required in the state of Delaware (or Michigan where Dodge v Ford occured) to _maximize_ shareholder value. It's that if you're going to make a decision that affects 1/3 of the companies value you need to actually claim it's in the shareholders interest that you do so.
  - MangoToupe 1y ago
    I don't think maximization of shareholder value is really the interesting part, it's the mandate that they must be prioritized ahead of employees and customers. > It's that if you're going to make a decision that affects 1/3 of the companies value you need to actually claim it's in the shareholders interest that you do so. I'm not really sure where the 1/3rd ratio came from. Can you explain? To my layman's ear, "value" and "shareholder value" are the exact same thing.
    - lesuorac 1y ago
      > I don't think maximization of shareholder value is really the interesting part, it's the mandate that they must be prioritized ahead of employees and customers. The problem is that Ford didn't try to claim that the factory was in the shareholder's best interest. > I'm not really sure where the 1/3rd ratio came from. Can you explain? To my layman's ear, "value" and "shareholder value" are the exact same thing. Nothing special about 1/3. It's the value of the dividend (19 M) / value of Ford (60 M). If you're going to spend 1/3 of the company on something you better at least claim it's in the company / shareholder's best interest. --- To quote the wikipedia article > Under some interpretations, the case also affirmed that the business judgment rule that directors may exercise is expansive, leaving Ford and other businesses a wide latitude about how to run the company, if management decisions can point to any rational link to benefiting the corporation as a whole. And then to emphasis: "if management decisions can point to any rational link to benefiting the corporation as a whole."

by duped 1y ago

sorcerer-mar 1y ago

Correct, because GP said “legal obligation," which I agree: there isn't one.

klik99 1y ago
Genuine question because I think I might be wrong on this one, or maybe misunderstanding what you're saying - aren't there cases of shareholders suing CEOs for not acting in shareholders interest and winning? If there was no legal obligation to act on behalf of shareholders how could they win those cases? My understanding is those kind of cases aren't common because a) they are hard to prove, b) the people being sued if they actually have the money to make it worth suing them also have the money to fight it, and c) it's a really bad look for an investor to be suing a previous member of their portfolio and would a strong adverse affect on their deal flow Unless you're saying there is no explicit legal obligation / fiduciary duty in law, but it does emerge from civil court cases, which is how I understand it, but short paragraphs are not a good place for the amount of nuance so I just said "legal obligation" as a shorthand for something real but very complex.
- duped 1y ago
  I think Matt Levine coined this phrase: "everything is securities fraud." Activist investors will sue for anything alleging that executives broke securities law by doing anything that harmed their portfolio. It doesn't mean they win the cases, or that anyone is guilty. There's also something worth noting that even if there isn't a legal obligation for executives to act on their shareholders interests, they have a really strong incentive when their compensation is mostly stock grants and the shareholders can fire them.
- sorcerer-mar 1y ago
  As far as I know, no there has not been a CEO successfully sued in the US for failing to maximize shareholder value.
  - deleted 1y ago
    [deleted]
  - airstrike 1y ago
    Board not CEO but see https://en.wikipedia.org/wiki/Revlon_duties https://en.wikipedia.org/wiki/Revlon_duties For CEO see https://www.rgrdlaw.com/cases-in-re-dole-food-co-inc-stockholder-litig.html https://www.rgrdlaw.com/cases-in-re-dole-food-co-inc-stockho...
    - cycomanic 1y ago
      The first paragraph from the first source: > The Court declared that, in certain limited circumstances indicating that the "sale" or "break-up" of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available. Seems to imply that under normal operation (i.e. no inevitable break-up) the fiduciary obligations are quite different though?
      - airstrike 1y ago
        Yes, under normal circumstances, the "business judgment rule" applies which is much more favorable to boards. Satisfying it requires only that directors: - act in good faith; - act in the best interests of the corporation; - act on an informed basis; - not be wasteful; - not involve self-interest (duty of loyalty concept plays a role here). https://en.wikipedia.org/wiki/Business_judgment_rule#Standard_of_review https://en.wikipedia.org/wiki/Business_judgment_rule#Standar...

lucas_membrane 1y ago

> from business ethics class, not law Well, there was one case in the law over 100 years ago in the USA. A company had decided to sell itself for cash and go out of business. The Court ruled, that in that situation, it should sell to the highest bidder. This is long before Milton Friedman began advocating that corporations had a duty to their common shareholders that provided the only valid yardstick for evaluating corporate activities. Friedman was an economist, and a controversial one, not a lawyer, and how he got the lawyers behind him is itself a long strange story. The idea that common shareholders own the corporation was not really obvious to anyone from the start. Common shareholders get from the corporation only what is their privilege according to the corporate bylaws and charter. There are now, and have been in the past, many different kinds of and classes of common shareholders. For example, some big corporations today have many common shareholders who do not have any voting rights. The thing that sets common shareholders apart from the other stakeholders who also hold pieces of paper from the corporation granting them various interests in the corporation, is that the common shareholders get to divide up whatever is left over if and when the corporation is liquidated and everyone else is given what they are owed first. They are more heirs than owners. It is more realistic to hold that the corporation, as an artificial person, is not and cannot be owned by other persons, and owns itself.

singleshot_ 1y ago
I am repeatedly entertained by the phenomenon of someone who reads a case, bothers to remember it, thinks it's important, describes it, but does not provide a citation. Friedman deeply misunderstands agency law. Saying he got the lawyers behind him is misleading, because there are any corporate fiduciary duties owed by directors or officers to the shareholder other than 1) act informed 2) do not usurp corporate opportunity.
trollbridge 1y ago
It’s incredible how many people don’t understand this. Google is an obvious example that has multiple classes of stock and only some are voting shares. There is the “shareholder lawsuit” but that really is about enforcing a company’s stated goals to its shareholders, which can and often are things other than “try to make the stock price go up as much as possible”.

MangoToupe 1y ago

https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co. This is not statute, but it remains legally binding in Delaware so long as the courts uphold it.

lesuorac 1y ago
It's not legally required in the state of Delaware (or Michigan where Dodge v Ford occured) to _maximize_ shareholder value. It's that if you're going to make a decision that affects 1/3 of the companies value you need to actually claim it's in the shareholders interest that you do so.
- MangoToupe 1y ago
  I don't think maximization of shareholder value is really the interesting part, it's the mandate that they must be prioritized ahead of employees and customers. > It's that if you're going to make a decision that affects 1/3 of the companies value you need to actually claim it's in the shareholders interest that you do so. I'm not really sure where the 1/3rd ratio came from. Can you explain? To my layman's ear, "value" and "shareholder value" are the exact same thing.
  - lesuorac 1y ago
    > I don't think maximization of shareholder value is really the interesting part, it's the mandate that they must be prioritized ahead of employees and customers. The problem is that Ford didn't try to claim that the factory was in the shareholder's best interest. > I'm not really sure where the 1/3rd ratio came from. Can you explain? To my layman's ear, "value" and "shareholder value" are the exact same thing. Nothing special about 1/3. It's the value of the dividend (19 M) / value of Ford (60 M). If you're going to spend 1/3 of the company on something you better at least claim it's in the company / shareholder's best interest. --- To quote the wikipedia article > Under some interpretations, the case also affirmed that the business judgment rule that directors may exercise is expansive, leaving Ford and other businesses a wide latitude about how to run the company, if management decisions can point to any rational link to benefiting the corporation as a whole. And then to emphasis: "if management decisions can point to any rational link to benefiting the corporation as a whole."