July 18, 2014
Primacy or Profits?
Posted by Lyman Johnson

I appreciated Alan's post yesterday about shareholder primacy and corporate profits. If I understand him correctly, he acknowledges both that the Hobby Lobby corporation did not maximize profits and that such behavior was wholly consistent with corporate law principles. Nonetheless, Alan believes, shareholder primacy still prevails because the shareholders who control the corporation derive utility from implementing their religious views through corporate action, even at a price to the enterprise itself in the form of reduced profits.

I think this neatly captures my point of yesterday about the missing "corporation." I would emphasize that in a highly salient legal and economic way, it is the Hobby Lobby corporation that is the institutional venue wherein religion is being exercised. The stockholders control it, along with the board of directors, and they can alter its strategy, but they are not co-extensive with it; those humans have lives, roles, interests, and relationships outside the corporate context, and should not linguistically or analytically be equated with the corporation. As Ron notes, yes, they may sit in pews on Sunday but they have other dimensions to their lives on Monday, in and out of the business setting.  By too quickly looking past the corporation to the stockholders, the "corporation" as an institutional, and responsible party, disappears, which, of course it does in the nexus theory, after a quick tip of the hat to bare and undeniable legal "personhood." This is a loss for reasons stated yesterday, among others, and the way in which corporate theory thus lacks a true theory of the "corporation" is neatly captured here. Maybe we are headed for a breakdown of theory for the close company verus the public that would be an advance...

But the primacy versus profits dichotomy is important in another way. It suggests a shifting of analytical emphasis away not just from what Justice Alito characterized as the corporate legal "fiction" to the humans "associated with it" but also from enterprise profit-making to shareholder utility. That latter shift would seem to have even less positive law support than the sparse authority on enterprise profits, such as Dodge and eBay, which focused, as I recall, on profit-making. Perhaps the dichotomy Alan sees in Hobby Lobby is the special case, and that is the reason for his desire to maintain a default of profit-maximizing: to avoid inquiries into what shareholders actually want in settings--such as public companies--where that is much harder, if not impossible, to gauge. Recognizing both the interests of the business enterprise and those of the stockholders, but not equating the two, also likely accounts for the continuation of the phrase "corporation and its stockholders" in much of Delaware law.

Anyway, I appreciate Alan's post for making the distinction he did in a very straightforward way.


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