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Bennett Rasmusen: The Goals of the Corporation under Shareholder Primacy

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Eric Bennett Rasmusen (Indiana University Bloomington – Department of Business Economics & Public Policy) has posted “The Goals of the Corporation under Shareholder Primacy: Just Profit — Or Social Responsibility and Religious Exercise Too?

The abstract is as follows:

Under the doctrine of shareholder primacy, the duty of a corporate director is to act for the benefit of the shareholders. This is not the same goal as profit maximization. It is only the same if shareholders care only about profit, which may or may not be true. The current Hobby Lobby case regarding a corporation’s religious exemption from the Obamacare emergency contraception mandate is an example: the shareholders have made clear that they wish the directors to spend more on litigation than could possibly be saved by avoidance of the mandate, and this should be a permissible corporate action. Goals other other than pure profit should be permitted both for public and for closely held corporations. For public corporations, in fact, maximization of market value under efficient markets may demand that the corporation sacrifice even long-term profit for other goals. This may be to the detriment of minority shareholders who value profit alone, but that is no different from the problem of minority shareholders who disagree with the majority’s dividend policy or operating decisions.

While corporate directors should and do have a fiduciary duty to act only for the benefit of the shareholders, not for customers, employees, and neighbors, this is not equivalent to maximizing profits, nor does it require (or even allow) directors to ignore their own religious beliefs. The business judgment rule gives directors enough power to use their own religious beliefs or to deviate to a sizeable if limited extent from their duty to act for the benefit of shareholders, but it is nonetheless worth detailing the interplay between the beliefs and desires of shareholders and directors in order that conscientious directors may know and follow their duty.

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