Wednesday, June 4, 2008

The Proper Purpose of a Corporation

One of the themes that we often explore on this Blog relates to the determination of the proper purpose of a corporation – i.e. whether a corporation exists solely to carry on business for the benefit of its owners (i.e. shareholders), or whether it has a larger responsibility towards other stakeholders and generally the society.

The Harvard Corporate Governance Blog has a post referring to essays by two leading U.S. corporate law professors who join the debate:

“In the latest issue of the Virginia Law & Business Review, we debate whether the classic case of Dodge v. Ford, and its claim that maximizing shareholder wealth is the proper purpose of a business corporation, deserves a place in the modern legal canon. Lynn argues that Dodge v. Ford is bad law, at least when cited for the principle that corporate directors should maximize shareholder wealth. As a positive matter, Lynn suggests, no modern jurisdiction follows this rule, and as a normative matter, advances in economic theory suggest that the goal of shareholder wealth maximization is at best inefficient and at worst incoherent. Jon argues that shareholder wealth maximization is both conceptually coherent and consistent with economic theory, and that Dodge v. Ford can be used to illustrate the fact that shareholder wealth maximization is both a valid goal for corporate law and an ethical requirement, even in contexts in which enforceability is practically impossible.

The debate can be found here.”
Regarding the subject-matter of the debate, i.e. the Dodge v. Ford case, please see a previous post on this Blog pointing to Wikipedia.

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