Jay Parkhill June 12th, 2008
There is a long-standing debate about the obligations of a company’s management to consider the needs of society at large. Economist Milton Friedman is famous for opining (to paraphrase) that the only duty of a company’s Board of Directors is to make money for the company’s shareholders.
In my view, this opinion completely sidesteps the issue of what time scale to consider, but it is entirely possible that a company could make tremendous short-term profit at the expense of segments of society at large, the environment, etc.
The California State Legislature has an opinion on this issue, too. There is a bill pending there (A.B. 2944 for the research-inclined) that would change the statutory duties of a director to include not only the company’s welfare, but society as well. The current duties of a director are to deliberate:
in good faith, in a manner that such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a likeposition would use under similar circumstances.
As amended, a director would be permitted, but not required, to consider:
(i) The long-term and short-term interests of the corporation and its shareholders;
(ii) The effects that the corporation’s actions may have in the short term or long term upon any of the following:
(A) prospects for potential growth, development, productivity, and profitability of the corporation;
(B) The economy of the state and the nation;
(C) The corporation’s employees, suppliers, customers, and creditors;
(D) Community and societal considerations; and
(E) The environment.
Pros/Cons Analysis:
From the social welfare side, this bill would say clearly that directors need not hew to the Friedman viewpoint and may take a broad view of corporate duties. On the other hand, the list of factors a director may consider is long and not well-defined. Merely deciding on the company/shareholders’ best interests is difficult enough and it is not clear to me that this language adds anything that is not implicit in Board deliberations anyway. Would this language be useful in preventing a company from, say, strip-mining with knowledge that heavy metals will leach into groundwater?
The answer is “no, not by itself”. However, this language does open the door for the B Corporation I have written about previously. B Corporations say loudly and clearly that their duties are to consider shareholder value alongside social benefits. As noted at the top of this post, that is not a universally-held viewpoint. Shareholders, directors, executives and the courts that eventually ajudicate questions of shareholder duty need some encouragement- not to mention law- to let them know that there can be more than one bottom line.
I am told that although 31 US states have similar laws on the books, this bill has been opposed from several sides. Having passed the Assembly it is in the State Senate currently, but its odds of making it out and across the Governor’s desk are uncertain. These things can take time, I suppose. If it doesn’t happen this year, let’s hope for next.
