Milton Friedman Has a Lot to Answer for: A Response to Joshua Fershee's 'Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility,'
Abstract
In his seminal article, economist Milton Friedman restated his position that "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits ... ." Evangelical Friedman preached to an appreciative choir, and his shareholder wealth maximization ("SWM") theory, emphasis intended, has survived Gordon Gekko's "greed is good" era to become a foundational corporate doctrine. While, as my colleague Joan Heminway so succinctly notes, "none of [the relevant] statutory frameworks regarding officer and director management or conduct mention no less require - management action in a manner that maximizes shareholder wealth or value or compels shareholder primacy[,]" shareholder primacy and the maximization of shareholder wealth are axiomatic corporate governance objectives. Even if it has not been codified, SWM is the mantra by which most corporate lawyers and MBAs are indoctrinated and how they frame their advice to directors: "maximize shareholder wealth." This makes sense given that, until the relatively recent introduction of benefit corporate structures, our system was structured binarily as for profit or non-profit, with our securities and tax laws regulating and perpetuating the distinctions.
This article considers the state of play in this area of the law, including the lack of a statutory obligation on directors to maximize short-term shareholder wealth in the ordinary course of everyday business decision-making; the the business judgment rule, under which, absent conflicts of interest, there is a presumption that directors acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company; and the "other constituency" statutes adopted by a substantial number of states that emphasize management's ability to consider the effects of corporate action on a variety of stakeholders when exercising business judgment.