WMN: t3_2375b2_t1_cgu6qn4

[TITLE]

CMV: If a corporation, after doing a cost/benefit analysis, determines that breaking a law/regulation will provide a net gain in shareholder value, it follows they must do so.

[Duke_Newcombe]

Just as the title says: XYZ Corp, beholden to the [fiduciary duty](http://www.law.cornell.edu/wex/fiduciary_duty) to maximize shareholder value, will / can, as a feature of Capitalism, knowingly break a law/regulation, if doing so will provide net and overall enhancement to shareholder value. If XYZ Corp can "get away with it", then it's all upside for shareholder value. If they get "caught", then fines or sanctions (as long as they do not negate net enhancement to revenues, and consequently shareholder value) are of no consequence.

[Crooooow]

Yes that is one of the many flaws of a capitalist society.

[Achlies]

CEO: "We can increase our revenue by employing 6-8 year old children to work 12-14 hour days building our widgets." Surely you see the problem.

[FockSmulder]

Is there a reason to put fiduciary duty over other legal duties?

[Duke_Newcombe]

Do corporations have a *legal* duty? I know their *fiduciary* duty is spelled out, and they can be sued it they don't *maximize* shareholder value--say, by timidity, and passing up unethical opportunities for profit, or be "punished" by the investor community for lack of growth.

[FockSmulder]

Do they have a fiduciary duty? It's spelled out, too. It seems like the endgame here is that we're going to agree that every individual in a company acts in his own best interests. Assuming that this is true, the word "must" doesn't really play into it. I guess I don't know what you mean by "must". What are the properties of this obligation?

[Duke_Newcombe]

[STA-CITE]>I guess I don't know what you mean by "must". What are the properties of this obligation? [END-CITE]As I said in another response, "must", as in..."are compelled and incentivized, per the business model and fiduciary duty, to maximize shareholder value, whatever it takes."

[FockSmulder]

Well, yeah. Individuals have an incentive to do it. I have an incentive to go to the gym, but that doesn't mean that I am obligated to do so.

[Duke_Newcombe]

Would you sue yourself for stuffing your face with cheese curls instead of going to the gym? Although there is an incentive (better health, looking better, etc.), there is no *external* penalty for failing to do so, is there? Could shareholders who invested claim that a corporation (represented by it's leadership) failed to meet their fiduciary responsibility due to lack of aggression?

[FockSmulder]

It isn't monetary (though it could be: if I was a bodybuilder, I'd be incurring an expected financial loss by skipping workouts -- I don't see how this obliges me to work out), but an incentive still exists. Health and appearance are directly related to the external world. Health is essentially a certain kind of ability to withstand physical interactions with the environment. Regardless, I don't see how the existence of an externally-imposed penalty creates an obligation. Nor do I see how an externally-imposed reward does. [STA-CITE]>Could shareholders who invested claim that a corporation (represented by it's leadership) failed to meet their fiduciary responsibility due to lack of aggression? [END-CITE]I don't believe that they could. A lawsuit takes place in a court of law, which naturally holds the law above all else. In contract law, the necessity of breaking a law in order to fulfil a contract vitiates that contract. It wouldn't be valid. I suspect that a similar preclusion exists for the sort of situation that you're describing. I'm not certain, though. I'd sooner argue that the deference of corporations to shareholders is immoral. It's a way of filtering out all personal responsibility, so that it's possible for nobody to feel responsible for horrific crimes.

[Bagodonuts10]

What if the net gain in profit doesn't outweigh the net loss in human welfare? I don't understand what you mean by "must" here. certain things matter more than money. Imagine a situation where a person could dump a ton of chemicals Into the water and get away with it all to have a net gain of a few hundred thousand dollars. Now imagine that many of their shareholders live near the river and the increase in the chance of cancer goes up 25%. Would you rather have a little extra money in your pocket or a better society where you are less likely to get cancer. Some laws are less important, but for the most part laws dont exist arbitrarily.

[Duke_Newcombe]

[STA-CITE]>Imagine a situation where a person could dump a ton of chemicals Into the water and get away with it all to have a net gain of a few hundred thousand dollars. Now imagine that many of their shareholders live near the river and the increase in the chance of cancer goes up 25%. [END-CITE]We don't have to imagine this. [Duke Energy Pumped Coal Ash Into NC River](http://www.cbsnews.com/news/duke-energy-pumped-coal-ash-into-nc-river-regulators-say/)

[Bagodonuts10]

I agree that they did it and this is a big issue with capitalism. But why "must" they do it? They wish to do is way more like it

[raptor6c]

I agree that this is what will happen, but I don't agree that it follows that it must happen. This is because no duty exists in a vacuum. To use a flawed, but close enough analogy, imagine you're a body guard with a family. You have a duty to protect your charge from harm and you have a duty to protect your family from harm. Now imagine your charge is in the process of trying to kill your family and they are fighting back and trying to harm your charge. You have a duty to protect your charge from harm against your family and you have a duty to protect your family from harm against your charge. These two duties are in conflict and you can only serve one, or none. If you believe that any single duty creates an ironclad obligation which must be undertaken regardless of the circumstances or any other duties you might have then my hypothetical bodyguard is a paradox, he can't obey both of his duties in this scenario. Similarly, the people who decide what a corporation will do may be duty bound to produce share holder value but they are also citizens of society and thus they are duty bound to obey the laws of society to the best of their abilities, regardless of their other duties. Further, they are not bound to obey the laws of society just because they will be punished if they don't, duty to obey the law exists, conceptually at least, as long as society and social laws exist. Even if there is no chance of the society actually punishing someone for breaking a particular law, that person still has a duty to obey it. Thus if a corporation is being directed by people who knowingly direct the corporation to break some law of society they are violating their duty to society in favor of their duty to the owners of the corporation. They do not *have* to violate their duty to society just because they also have a duty which could come into conflict with their duty to society. The two duties can coexist, requiring the directors of the corporation create shareholder value while also obeying the laws of society. If it comes to pass that the only ways the directors can see for the company to increase their shareholder's value would all require violating the laws of society then every individual citizen director has a duty to inform the shareholders of their viewpoints and resign from the company rather than violate the laws of society if the shareholders (who also have a duty to society) collectively decide to ignore their duty to society while hiding behind limited liability and instruct the directors to break the law.

[DerekReinbold]

This is a very narrow way of looking at the type of cost-benefit analyses that a corporation may make. Direct profit vs. fines are not the only angle that this can/should be approached from. Take the current example of GM and its ignition switches. Clearly, they employed a limited form of cost-benefit analysis and decided not to recall the cars. They are facing penalties now for doing so. Fine. That's what you are talking about. But what about the negative publicity they are receiving, what about the possible thousands of consumers that will be turned away from their products in this and coming years because they feel they cannot trust the manufacturer. This is a logical thing for a customer to include in his/her consideration of what automobile to buy. Why, then, would a corporation not include this in its cost-benefit analysis? What I'm saying is, the consequences of breaking the law/doing the "wrong" thing are not always strictly fine-based. Company reputation matters, and may tilt the scales in favor of good behavior in some/many cases.

[rparkm]

[STA-CITE]> may tilt the scales in favor of good behavior in some/many cases. [END-CITE]"May" being the operative word there.

[Cavemonster]

By "must" do you mean legally? Because that's simply not true. A contract provision that requires illegal acts is unenforceable. The laws of the state/country trump contract law any day. Can you point to a recent case in which people were successfully sued for failing to break the law? Do you mean ethically "must"? That would necessitate a situation where fiduciary duty is elevated beyond all other ethical duties. I'd be interested to see an argument for that, and I'd be really impressed with an argument that everyone must subscribe to an ethical system where that's true. If you mean "Will tend to" then sure, but that's very different from the strong wording of your OP.

[Duke_Newcombe]

[STA-CITE]>Do you mean ethically "must"? That would necessitate a situation where fiduciary duty is elevated beyond all other ethical duties. I'd be interested to see an argument for that, and I'd be really impressed with an argument that everyone must subscribe to an ethical system where that's true. [END-CITE]Is this too far beyond the pale to think that a corporation would elevate fiduciary duty above ethical duties (assuming they *have* such a duty)? [STA-CITE]>If you mean "Will tend to" then sure, but that's very different from the strong wording of your OP. [END-CITE]Actually, this argument makes sense. I perhaps did not clarify sufficiently. ***Must***, as in "according to the business model, are *incentivized* and *compelled* to break the law, when the cost/benefit analysis shows it to maximize shareholder value". **EDIT:** Be that as it may, I upvoted you--you didn't so much change my view, as streamline it and make it less generalized. Good job.

[Cavemonster]

[STA-CITE]>Actually, this argument makes sense. I perhaps did not clarify sufficiently. Must, as in "according to the business model, are incentivized and compelled to break the law, when the cost/benefit analysis shows it to maximize shareholder value". [END-CITE]Incentivized? Clearly. Compelled? They aren't forced to act in that way. They are under no legal duty. There are many mechanisms that put pressure on a corporation to maximize profit, but none that force those who make the decisions to do so at all costs necessarily. There may be a particular board of directors who act in such a way, but that's specific to the actions of those individuals, not universal to corporate action.

[Blear]

I would love to change your view, but this is pretty much how corporate law works in America. Some of the terminology you used is a little imprecise, but you've got the gist of it. For instance, corporations will gladly pay the tax penalties of the Affordable Healthcare Act rather than insure their employees. However, you should look into B Corporations. This is a new form of corporate organization which has, as its mission statement, philanthropic or humanitarian goals as well as fiduciary duty to the shareholder. I'm not sure to what degree these will catch on, but that's as close as I can get to changing your view on this one.

[jetpacksforall]

Okay, I think you're getting some legal principles confused here. First of all, fiduciary duty *does not apply to corporations*. Fiduciary duty pertains to *fiduciaries*, that is, people who have been vested with a fiduciary trust. In the case of corporations, that means directors and officers of the corporation. These people can be sued in a court of law for breach of fiduciary trust, which generally involves things like conflict of interest, fraud, negligence, etc. It's a bit strange for you to say it's the corporation's fiduciary duty to maximize shareholder value since, in a way, the shareholders are the corporation. So when we talk about fiduciary duty we are talking about directors, board members and senior corporate officers, not corporations as such. Secondly, directors and corporate officers **cannot be prosecuted for "failing to maximize shareholder value"**. The idea that corporate officers and directors have a positive legal obligation to maximize shareholder value - the same way that doctors have an obligation to maximize patient health - is false. There is no such legal obligation. This false idea comes from a widespread misreading of a classic case in corporate law: *Dodge v. Ford Motor Company*. The court in that case ruled that Henry Ford could not take special dividends he owed to his stockholders and reinvest them in the company primarily for the benefit of his employees and the wider community. In other words, the judgment declared that Henry Ford could not run his company as a charity, giving profits to third parties instead of to the stockholders he owed them to. That judgment absolutely does not say that corporate officers must act at all times to maximize corporate profits, it merely says that officers can't reclaim corporate profits and give them away to third parties. [STA-CITE]>Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court's 1919 opinion in Dodge v. Ford Motor Co. [END-CITE][STA-CITE]>This Essay argues that Dodge v. Ford is bad law, at least when cited for the proposition that maximizing shareholder wealth is the proper corporate purpose. As a positive matter, U.S. corporate law does not and never has imposed a legal obligation on directors to maximize shareholder wealth. From a normative perspective, options theory, team production theory, the problem of external costs, and differences in shareholder interests all suggest why a rule of shareholder wealth maximization would be bad policy and lead to inefficient results. [END-CITE][STA-CITE]>Courts accordingly treat Dodge v. Ford as a dead letter. (In the past three decades the Delaware courts have cited the case only once, and then on controlling shareholders' duties to minority shareholders). Nevertheless, legal scholars continue to teach and cite it. [END-CITE]- Lynn A. Stout, "[Why We Should Stop Teaching Dodge v. Ford](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013744)" So there is no law that says corporate directors and officers must at all times maximize share value above all other considerations. Furthermore, any shareholder who wants to sue corporate officers for failing to maximize value has to overcome the [business judgment rule](http://en.wikipedia.org/wiki/Business_judgment_rule) which is a legal principle which holds that business experts like CEOs should be given wide latitude in how they go about managing corporate interests. Thirdly, and finally, the law itself. Every single corporation on earth is incorporated and licensed to operate in one or more legal jurisdictions. Part of the articles of incorporation declare which state the corporation is incorporated within, and affirm that the corporation and its officers **must abide by the laws of that state**. For example, here are Microsoft's full [Articles of Incorporation](http://www.microsoft.com/investor/CorporateGovernance/PoliciesAndGuidelines/articlesincorp.aspx) which state: [STA-CITE]>The Corporation is organized for the purposes of transacting any and all lawful business for which a corporation may be incorporated under the Washington Business Corporation Act, Title 23B of the Revised Code of Washington, now or hereafter in force (the "Act"). [END-CITE]Any and all *lawful* business. The corporation in its very charter declares its intent to obey the laws of Washington State. The implications of these three factors should be pretty clear, but I'll spell them out just for clarity's sake. **TL;DR:** 1. Only officers or directors can be accused of "fiduciary negligence" before a civil or a criminal court, and corporations as such are not fiduciaries; 2. There's no such thing as a legal "duty to maximize shareholder value" as a fiduciary. But let's say you could get around that and you manage to find a judge who actually believes *Dodge v. Ford* can be applied that way, you still wouldn't be able to prosecute for *failing* to violate other laws if only because; 3. Corporations, corporate directors and corporate officers have a positive legal duty to uphold the law in the states in which their corporation is chartered to do business. There isn't a court on earth that is going to allow a prosecution for breach of fiduciary duty against a CEO because they *failed* to violate the law their corporation is chartered under. **TL;DRTL;DR: there's no legal obligation to maximize shareholder value, but there *is* a legal obligation for corporate officers and directors to obey the law. Even if there was a legal obligation to maximize value, no shareholder or prosecutor is going to be able to bring a case against someone for obeying the law.**

[RonZacappa]

The issue with your view is that it only follows one branch of business ethics. You are talking about stockholder theory, which states that the responsibility of a firm is to maximize shareholder value. However there are other philosophies at play. There is social contract theory which is the theory that firms owe a responsibility to society as a whole for allowing them to exist. And then there is the stakeholder theory which states that managers are beholden to anyone who has a stake in a company, this includes employees and local communities. There are many firms out there that would dispute their responsibility is to only stockholders. If you look at Patagonia, in 2009 they launched a campaign called "Don't Buy This Jacket," in it they encouraged consumers to look at the effect of their consumption on the environment as a whole. This allowed them to build even stronger in roads to their target consumers and strengthen their market position. However it was a risk, their campaign could have been viewed as insincere by consumers and rejected. Besides if a firm does cost/benefit analysis (assuming it is that simple) and determines that an illegal action is cost effective then the individual executives or managers risk criminal prosecution, like what happened with Enron.

[Funcuz]

Not really. See, it depends on what they're doing. I think you'd be surprised at just how much this sort of thing can cost a company. The cynic says "Hmphhh...they all do it anyway and all that these guys ever think about is profit anyway." You've got to remember that these are actually people you're talking about and in the end, no matter the popular perception, it really doesn't make any sense at all to break most of the laws. So you've got to ask yourself : What laws are worth breaking ? Well the small infractions aren't worth the trouble and definitely couldn't benefit in the long run. The big risks could land the CEO sharing a cell with a guy better suited to a great ape enclosure at a zoo. So what we're really talking about are those medium risk things. Well, then you have to factor in a few other things. Even if you believe that these guys have no conscience you've got to remember that the people they get their money from have ears and eyes. A little bad publicity is all it takes for a lot of customers to switch from Coke to Pepsi. Making illegal decisions on behalf of shareholders may well cost you your job. This is about more than just money even if it seemingly leads there in the end. Any threat to the company requires immediate action and if you're a shareholder who's just found out that the new CFO has been "forgetting" to file *all* the taxes then that's a direct threat to your financial interests.

[TheShadowCat]

Businesses should not be breaking the law to increase share holder wealth. The laws are suppose to be written so that any company that is caught breaking the law will face consequences that far outweigh the benefits gained from breaking said law. Unfortunately this is not how is works in the real world. One thing to realize, is that the person who makes the decision to break the law can be held criminally and financially responsible for the crime. Again, in the real world, this isn't always the case, but it is enough to remove the fiduciary duty. When doing a cost benefit analysis you always need to factor in the risk of something occurring, in this case getting caught. Breaking the law may be profitable if a company can get away with it for a year, but what are the chances of getting caught in the first year, or even first month? And let's not forget that the costs aren't always simply paying a fine, it may include restitution, punitive damages, criminal charges, loss of enrichment, and loss of public goodwill. So let's make up an example. Let's say you run a company that makes rims for cars. You sell both to the after market and directly to the manufacturers. One day you come up with a scheme to import cheap aluminium from North Korea. You do the math, and by importing from North Korea, you will save $5 million a year. You also look into the fine, and it's only $500,000. So let's say you make it one full year before you are caught. Right away the government slaps you with the fine. Then when word gets out, all of the manufacturers drop you, and take you to court for the unjust enrichment of selling them North Korean aluminium and on top of that, the after market shops don't want to deal with you, unless you drop your prices significantly. And there still could be criminal charges for doing business with an enemy of America. On top of this, the share price drops, because many people don't want to hold stock in a company that deals with North Korea. So not only have you fucked over the share holders, you have also put yourself at risk of losing your freedom. This was a very simple example. There are many other cases where breaking the law can have some much more serious drawbacks, like manslaughter charges, loss of the ability to do business, major environmental clean ups, or even violence against the company. The laws should be written in a way, and enforcement should be adequate, that breaking the law is clearly not in the best interest of the share holders, and would not be the fiduciary duty of the executives.

[Duke_Newcombe]

∆ This very good explaination has CMV, at least a bit. I now would posit: **Some** companies, after a cost/benefit analysis (taking into account both risks of detection, prosecution, penalties, **and** loss of revenue and Good Will, **when compared to** enhancement of shareholder value), have a compelling incentive to break laws/violate regulations in order to increase shareholder value.

[caw81]

1. Good for you for the delta. Shows a mature mind. 2. You can replace "companies" with "people" in your statement, so its not anything particular to companies, its just a human activity. (In fact people break the law even if the cost/benefit does not make it worth it.)

[DeltaBot]

Confirmed: 1 delta awarded to /u/TheShadowCat. ^[[History](/r/changemyview/wiki/user/TheShadowCat)] ^[[Wiki](http://www.reddit.com/r/changemyview/wiki/deltabot)][[Code](https://github.com/alexames/DeltaBot)][[Subreddit](http://www.reddit.com/r/DeltaBot/)]

[mrg58]

The problem with this is that there might not be a way for these cost/benefit analyses to incorporate potential punitive damages into the model. While some states have caps on the amount of punitive damages that can be awarded, there are still many that have no caps. The purpose of punitive damages is to deter people/corporations/etc from engaging in behavior that caused the lawsuit. So no matter who it is, the damages will be set high enough that they "feel" the financial hit. Shareholders might be okay with the company doing some illegal things if they are making money, but that sentiment can quickly turn to outrage if the company ends up losing money in reality.

[rparkm]

And this is exactly why I have a problem with tort reform. Get rid of the punitive damages and it becomes not only more likely that companies will behave badly, but as OP points out, they have a fiduciary duty to do so.