Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a centuryâ€™s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. Whatâ€™s more, when directors go against shareholder wishesâ€”even when a loss in value is documentedâ€”courts side with directors the vast majority of the time. Shareholders seem to get this. Theyâ€™ve tried to unseat directors through lawsuits just 24 times in large corporations over the past 20 years; theyâ€™ve succeeded only eight times. In short, directors are to a great extent autonomous.
And yet, in an important 2007 article in the Journal of Business Ethics, 31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said theyâ€™d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.
There`s two pretty interesting things here. Firstly that “Shareholders do not own the corporation, which is an autonomous legal person”. I suppose intuitively this makes sense. We all know, from watching The Corporationif nothing else, that corporations have legal personality. And although a lot of lefties make a really big deal out of this, I`ve never heard anyone point out the flip-side which is that as Corporations have a legal responsibility in and of themselves, it is not legally justified to act solely in the interests of the shareholders. (If this is legally wrong, I appreciate someone pointing it out).
Â The other interesting thing is the rather shocking finding in the Journal of Business Ethics. I hadn`t come across that before.