Lyman, This is an important post, which touches on the heart of "faith and corporate law" for me. As we have discussed, nothing in the current configuration of corporate law impedes companies from establishing goals other than shareholder primacy. One might assume, therefore, that the almost uniform pursuit of shareholder wealth maximization is simply the effect of the market inspiring certain choices. This is undoubtedly true for many firms, but for other firms, the choice to pursue shareholder wealth maximization at the expense of other goals is probably less about economics than sociology. It's what business managers are taught in most business schools. It's what prior generations of business executives have done.

Anyway, one of the foundation stones of any discussion of "faith and corporate law" is the fact that discretion in the operation of businesses is expansive. Entrepreneurs can form businesses for any purpose they want, as long as it's not illegal. And managers of existing businesses have broad discretion to pursue various (often conflicting) goals. Corporate law simply has little to say about any of this. Which makes me wonder whether the conversation about "faith and corporate law" isn't a fairly short one.

This conversation, like much of the academic literature on corporate law, seems focused primarily on large, publicly traded corporations. These corporations have to maximize profits not because federal or state laws require it but because the laws of the markets require it. Corporations, like Costco, that put other goals above maximizing profits, such as employee benefits, are punished in the stock markets with lower share prices, which in turn hurts their ability to borrow money from banks and other sources. Only a very small portion of the public, which is increasingly dependent on investments in corporate stocks and bonds for their retirement portfolios, is willing to take lower returns to support companies that pursue non-profit maximizing goals. Most of the social responsibility investment (SRI) funds claim to earn returns that are roughly the same as other investment funds in order to attract investors. Large institutional investors, which now control over 60% of the investments in publicly traded companies, also are not interested in investing in companies that are not engaging in shareholder wealth maximization practices. These institutional investors owe fiduciary duties to protect and maximize the funds under their management. Again many of these are pension funds or university or other philanthropic endowments which need the funds to meet future obligations. They would be breaching their fiduciary duties if they elected to invest in firms that subordinated profit maximization for other goals.

Most businesses, including most corporations, in the US are NOT publicly traded. Most of these businesses are small and, while their owners hope to make a profit, a significant number of them are operated for reasons other than maximizing profits (e.g., desire to be their own bosses, interested in developing a new product or invention, interested in pursuing a lifestyle different from that available in a large corporate setting, etc.). Some of these other goals are religious or socially responsible. In addition, there are a number of large but not publicly-traded corporations, like SC Johnson, that are freer to purse other goals. They are freer to do so because they don't have to worry about being punished by the stock market analysts, traders, and investors for doing so. It is these non-publicly traded firms that fill in that spectrum mentioned by Lyman and others.

One issue that I have not seen mentioned in this discussion is: to what extent do lawyers and other gatekeepers who are advising firms considering going public have an obligation to discuss the constraints on the goals of a public corporation or business with the owners? (Corporations are not the only publicly traded entities. There are a few LLCs and LPs that have their ownership interestes traded on NYSE and Nasdaq.) It may be that such conversations are unnecessary as the owners are aware of the extent to which they will lose control of the business once it goes public. I, however, am not completely convinced that this is always the case, particularly when owners are getting very persausive sales pitches from investment bankers looking to drum up business for themselves. The owners of the Body Shop seemed to have believed that the company would continue to pursue its environmental and social objectives with the same vigor after it was taken over L'Oreal, a publicly trade corporation. In the end, however, L'Oreal cutback substantially on these programs after gaining control. The Body Shop's Ethiscore dropped from 11 to 2.5 after L'Oreal acquired it. See OECD publication, Informing Consumers on CSR in International Trade, at http://www.basisboekmvo.nl/files/OECD%20Report%20on%20CSR%20communications.pdf

Talking about the downsides of public ownership might get more frequently discussed now in the wake of Sarbanes-Oxley then it did previously. In the late 1990s a large number of companies went public because it seemed to be the thing to do and only later realized that the costs outweighed the benefits, particularly if their stock ended up in the large group of stocks that are rarely followed by the analysts and are lightly traded.

Finally, while non-publicly traded businesses can pursue other goals rather than profit maximization, they still have to at least break even or make some profit or their creditors will not allow them to pursue their other goals. For example, Maldin Mills Industries, the original manufacturer or Polartec, was operated for years by Aaron Feuerstein, in accordance with his views as a religiously observant Jew. When the factory burned down, he rebuilt in Lawrence because he felt that his religion imposed on him a moral obligation to care for the community and for his workers. He continued to pay the workers for much of the time that the factory was closed. He was highly praised for these actions by President Clinton and others. In the end, however, the expenses of rebuilding and the loss of market share while the factory was closed forced Malden Mills into Ch. 11 bankruptcy. The creditors forced Mr. Feuerstein out as CEO and put in place new management that would maximize profits.

Of course, just because a firm is being operated to maximize profits doesn't mean that management will succeed in doing so. The new management at Malden Mills didn't do much better with their profit maximization strategies. The business went back into bankruptcy in 2007 and its assets were sold to a new company called Polartec, LLC which is owned by Chrysalis Capital Partners.

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