July 17, 2014
Hobby Lobby, Shareholder Primacy and Proft Maximization
Posted by Alan Meese

For what it’s worth, I commend Lyman’s thoughtful post “A Missing Person: The Corporation.”   As noted in my prior post and other work on the subject, I do not believe that Hobby Lobby’s decision to pay above-market wages, provide exceptional service to customers or donate generously to charity contradicts corporate law, even if such conduct results in lower profits than the firm would otherwise enjoy.   Nor should we change corporate law to prohibit such conduct.  Like Lyman, I believe that a free society should encourage the creation and maintenance of institutions like Hobby Lobby that both create wealth for their owners but also confer benefits on the rest of society by, for instance, creating well-paying jobs.  (According to this source, the minimum wage for full time employees at Hobby Lobby is $14.00 per hour, even higher than Lyman reports.)   Finally, I agree with Lyman that neither corporate law nor the academy should devalue such conduct because of its religious motivations.

Unlike Lyman, however, I would characterize at least some such institutions as quintessential exemplars of “shareholder primacy in action.”    Hobby Lobby behaves the way it behaves because the Greens, in their capacity as shareholders, have induced the firm to do so.  (Brett raises a separate and very good question about what steps shareholders should have to take to legitimize such behavior.  I will address this question in a subsequent post.)   If the Greens converted to Atheism tomorrow, the firm would soon behave differently.  (While Atheists, for instance, might choose to pay high wages out of secular concerns for fairness, they would not close on Sundays.)   The Greens behave this way within an institutional framework that authorizes them, as shareholders, to set the course of the firm they own and induce the firm to pursue religiously-motivated conduct to the detriment of profit.   While the Greens are less wealthy as a result of the various policies Lyman catalogues, their behavior is voluntary, so we can presume that their utility is higher than it would be if Hobby Lobby pursued profit exclusively.

While some federal judges opined that Hobby Lobby’s behavior violated an immutable profit-maximization norm, the Hobby Lobby Court quite rightly recognized that corporate law contains no such immutable norm.  In my view (and Lyman apparently disagrees), the Court did so by embracing, not rejecting, shareholder primacy.  The Court recognized that a “corporation is simply a form of organization used by human beings to achieve desired ends.”  Those ends, of course, often include more than just profit maximization.  The Court also opined that “protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.” (emphasis added)  It looked to the beliefs of these “owners,” which it described in some detail, to determine whether the HHS mandate burdened the corporations’ religious exercise.  (See e.g. n. 7.)  As explained in my prior post in this symposium, this focus on shareholder primacy is not consistent with the sort of corporate social responsibility that Milton Friedman decried as Socialism.  While other case law might support such an approach, I respectfully submit that Hobby Lobby does not.

In his first post, Lyman takes issue with my assertion in a prior essay with Nate Oman that profit maximization is a default rule that shareholders may alter unanimously.  Let me begin by clearing up some confusion.  Nate and I did not contend that unanimous consent was necessary to alter such a default rule; we only claimed that such unanimous consent was sufficient.   By all accounts, Hobby Lobby’s shareholders unanimously reject profit maximization in favor of religious exercise.  Our essay dealt with the case before the Court and took issue with those who claimed that the very nature of corporate law somehow precludes religious exercise by business corporations, even when shareholders unanimously endorse such a course of action.  Lyman is of course correct that something less than unanimity is sometimes sufficient, as when shareholders amend the charter.  Other legal devices might require more.  For instance, while Delaware enforces agreements between a majority of shareholders, some other states appear to require unanimity.  I agree with Lyman that the Court's opinion does not endorse any particular voting rule, and I did not mean to suggest otherwise.

More fundamentally, Lyman objects to our account of the content of the default rule.  As a normative matter I believe the default rule should be one of profit maximization. Whether I am correct is a topic for a different symposium.  But here again, our essay was somewhat more guarded.  In particular we said:

“While some case law [citing Dodge v. Ford] suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules.”

In other words, we assumed for the sake of argument that there is a profit-maximization norm but pointed out that such a norm is not immutable under any account of corporate law.   While Hobby Lobby does not expressly embrace such a profit-maximization norm, the Court's invocation of the "agreement" and "approval" by owners of practices that depart from profit maximization suggests to me that the Court believes there is some background norm the departure from which shareholders must approve and that the norm is profit maximization.  I also hasten to add that I may be reading too much into this language, as Brett suggests in one of his posts.  But even if I am, I see nothing in the opinion that rejects a profit maximization default rule, either.  

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