Business Schooled: Primary Obligation of Corporations

Gotta Make Money

BY JAMES HUG SJSeptember 5, 2013

For years I’ve been told that businesses have a legal responsibility to maximize profit or shareholder value.  So what can they do when there is cheaper labor overseas or in non-unionized areas?  They have to pursue it.

Is that taken for granted in your business classes?  Ask about it.

The fact is: that claim has been a widespread and highly effective myth (I want to say “lie”) perpetrated on us all that has legitimated disregard for workers and communities, contributed to jobless recoveries, helped spawn a huge rise in executive salaries, and played a significant role in the rapidly growing disparity of wealth in the world today.

In an insightful and well-documented article on the front page of The Washington Post August 27, 2013, Jia Lynn Yang provides a case study of the shift of IBM from being a company committed to balancing profits “between the well-being of employees and the nation’s interest,” a company that proudly avoided any layoffs during the Great Depression of the 1930s, a company that acknowledged as one of its key corporate values “our obligation as a business institution to help improve the quality of the society we are part of.”  By the mid-1990s, in what business historians consider a legendary turnaround, the company enshrined shareholder value among its top priorities, demoting the needs of employees and their communities to its lowest stated concern.

Lynn Stout, a professor of corporate and business law at Cornell Law School, traces the claim of shareholders’ priority to a 1970 article by Milton Friedman, star of the now widely-discredited Chicago School of free market economists, in which he argued that the only “social responsibility of business is to increase its profits.”

Others joined that bandwagon, Wall Street loved it, international competition and the media fueled it.  Before long it became “common knowledge,” an unquestionable mantra generally assumed to be codified in corporate law.

But it’s not.  Yang documents legal experts insisting “there is no statute in state or federal law requiring corporations and executives to maximize shareholder value.”  The courts give managers and directors wide latitude.

So how do we raise again the issue of corporations’ primary obligations to their employees and the communities they’re located in?  Recent Catholic Social Teaching insists on them, though I suspect that doesn’t get enough attention in most business courses.  But doesn’t it just make good business sense that in this time of jobless recoveries and decaying communities, clear commitment to one’s workers and community would be an attractive “added value”?  Let’s get this discussion going.

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