Re: A Shock Ripples Through The Blogosphere

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Am I the only one who thought he was already married?


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 7:10 PM
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He was waiting for the kids to be old enough to enjoy the ceremony.


Posted by: John Emerson | Link to this comment | 07-25-08 7:15 PM
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A wonderful post, LB! Even though Posner is a thoughtless knucklehead!


Posted by: Sifu Tweety | Link to this comment | 07-25-08 7:16 PM
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Pacing, dude.


Posted by: parsimon | Link to this comment | 07-25-08 7:16 PM
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I'm hoping Napoleon Adolf got to wear his Serbian WWI helmet to the ceremony.

And of course Posner's a knucklehead -- that was what I was trying to convey.

(Also, no promises, but I should be around more. Work has settled down a bit; I won a discovery motion which means I won't have to spend the summer reviewing and logging documents, and a nitwit plaintiff saw a motion I wrote on another case, panicked, and dismissed us from the case completely. I get no credit for the second one -- the guy was hopelessly in over his head from the beginning.)


Posted by: LizardBreath | Link to this comment | 07-25-08 7:22 PM
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Sifu, your critique of Posner is silly. I certainly don't always agree with him, but he's undoubtedly one of a few living people who can accurately be called a genius. If you have read more than 1% of what he has written, I'd be shocked (and not only because he is perhaps the most prolific public intellectual, say, ever).

That aside, LizardBreath is right. Posner is merely reflecting the consensus of corporate law for the last 75 years, but wrongly so here. Her point has been brought into rather stark relief for me personally, as over the last year I have transitioned from corporate lawyer to helping run a smallish family business. It's been a consistent pattern of law (and b-) school theories (like strict separation of owner and manager/employees interests, maximization of profits at all costs, etc.) getting drowned by the facts of a real life privately held company.

Anyway, it's a thoughtful post, LB, and a point too often overlooked.


Posted by: Dan | Link to this comment | 07-25-08 7:24 PM
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Sifu, your critique of Posner is silly. I certainly don't always agree with him, but he's undoubtedly one of a few living people who can accurately be called a genius.

And you, sir, are a goofy concern troll.


Posted by: Sifu Tweety | Link to this comment | 07-25-08 7:26 PM
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Also if I ever read more than 1% of what Posner has written, my god, shoot me, won't you?


Posted by: Sifu Tweety | Link to this comment | 07-25-08 7:29 PM
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I had to look up what "concern troll" meant. A rather bizarre claim.

You should step away from the computer screen more often. It's summer, you know, and nice out.


Posted by: Dan | Link to this comment | 07-25-08 7:30 PM
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Reading 1% of what Posner's written would take about a decade, probably.

A former professor of mine commented that Posner publishes an article every other day (or something like that, I can't remember the exact phrase), and when you do that, you don't have time to think.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 7:31 PM
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Whenever you encounter Posner's sort of extraordinarily high productivity, tests should be done to rule out amphetamine abuse. The writings should also be examined for euphoria and a weakened reality sense.


Posted by: John Emerson | Link to this comment | 07-25-08 7:32 PM
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The biggest trick the Devil ever played on man was convincing America that corporations are legally required to be the Devil.

Also, if you replace the word "investors" with "speculators" in all these intensely logical explanations of Posner's crystalline purity of principle, they become a lot less appealing. But isn't an investor who doesn't care what the company makes or does or employs a speculator? And isn't that what just about every big investor is? Even pension funds, towns in Norway, et cetera.


Posted by: Fatman | Link to this comment | 07-25-08 7:32 PM
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9: really? I should? Why? Because I haven't been spending enough time reading Richard Posner? Oh! I get it, no: because I haven't spent enough time commenting on unfogged. Good call, sprezzatura. What else should I read?


Posted by: Sifu Tweety | Link to this comment | 07-25-08 7:32 PM
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Chicago school economists are so cute when they drop their bland, snarky cynicism and become passionate about something they really care about, like the fiduciary duty to maximize profits.

*Note: I posted this twice on the CT threads and people ignored me, damn their eyes.*


Posted by: John Emerson | Link to this comment | 07-25-08 7:36 PM
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Also, if you replace the word "investors" with "speculators" in all these intensely logical explanations of Posner's crystalline purity of principle, they become a lot less appealing. But isn't an investor who doesn't care what the company makes or does or employs a speculator? And isn't that what just about every big investor is?

You can be a profit-maximizing, child-labor-exploiting, Congressman-bribing nineteenth-century robber baron and still care about getting railroad track laid while you twirl your mustache. I think the number of people who genuinely don't care what a company does is pretty small (and they all read Investor's Business Daily).


Posted by: snarkout | Link to this comment | 07-25-08 7:36 PM
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... taking as an axiom that shareholders in large corporations have no goals other than maximizing their monetary returns

I thought this was just one instance of the larger assumption that money is the measure of all goods. But I haven't read much of his writing, either.


Posted by: Michael H Schneider | Link to this comment | 07-25-08 7:36 PM
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And why is the stock value so important as the goal we strive toward? Does it work like that for commodities? Are the owners of iron ingots morally required to sell them for more than they paid in order to prop up the price for all the other people who own the same stuff? Are the buyers morally required to keep the price high?


Posted by: Fatman | Link to this comment | 07-25-08 7:39 PM
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Media groups that go public and acquire this Posner fiduciary obligation to maximize return always get worse. Often family owned media groups do this when the time comes to divide up the inheritance.

One reason why Republicans push the inheritance tax so hard is that a lot of media groups are family owned. The publisher of the Seattle Times has admitted that the inheritance tax was the major reason he supported Bush.

Pretty much lose-lose from our point of view. When truth is put on the market, it becomes expensive and scarce.

*Also posted on the dead CT thread*


Posted by: John Emerson | Link to this comment | 07-25-08 7:44 PM
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LB, I've neither read whatever it is by Posner you're discussing, nor am I disputing that he's full of asinine ideas (to a surprising extent for such a brilliant man), but I'd suggest you re-read Dodge v. Ford Motor Company.

(If you're arguing that the outcome of the case was stupid, fine, agreed. But to suggest this is somehow Posner's idea, much less Posner's mistaken idea, is a bit off.)


Posted by: Brock Landers | Link to this comment | 07-25-08 7:44 PM
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1) Are Fortune 500 companies special cases, always having to fear hostile takeover?

2)Top Management partially compensated with stock options of course have reasons to puch stock price uber alles, especially if

3) They are hired guns or superstars of limited duration. The GlobalCorp/F500 I am...nah too revealing.

The above may have nothing to do with what Posner & LB are discussing.


Posted by: bob mcmanus | Link to this comment | 07-25-08 7:45 PM
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To a surprising extent for such a brilliant man....

Amphetamines, like I said.

No, I'm not kidding.


Posted by: John Emerson | Link to this comment | 07-25-08 7:46 PM
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3) They are hired guns or superstars of limited duration. The GlobalCorp/F500 I am...nah too revealing.

What, on the board of?


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 7:49 PM
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You can be a profit-maximizing, child-labor-exploiting, Congressman-bribing nineteenth-century robber baron and still care about getting railroad track laid while you twirl your mustache. I think the number of people who genuinely don't care what a company does is pretty small (and they all read Investor's Business Daily).

I would say the robber barons weren't investors, they were owners. They had some control over the company. A lot of the owners are also stock holders, and the stock price is another way to make them rich. They aren't focusing on the stock price because of their moral obligation to all the minor investors who are theoretically owners but don't actually have any influence over their actions.


Posted by: Fatman | Link to this comment | 07-25-08 7:50 PM
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LB, I've neither read whatever it is by Posner you're discussing, nor am I disputing that he's full of asinine ideas (to a surprising extent for such a brilliant man), but I'd suggest you re-read Dodge v. Ford Motor Company.

It's pretty much accepted that if the Dodge vs Ford case (which is more or less the basis of the view that directors' common law fiduciary duty of care implies an obligation to maximise equity value) came to court tomorrow, it would be a pretty shoddy legal team that couldn't win it for Henry Ford.

I don't think you can sue microsoft and make them hand out dividends.


Posted by: lemmy caution | Link to this comment | 07-25-08 7:52 PM
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14:Austan Goolsbee, the University of Chicago economist with his hand up Obama's back, has written a paper on the effects of different kinds of compensation taxation on corporate strategies. Short summary, IIRC, taxing stock options at a higher rate benefits labor/increases wages within a company.

It's a empirical study, lots of data.


Posted by: bob mcmanus | Link to this comment | 07-25-08 7:52 PM
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What, on the board of?

mcmanus is Rex Tillerson.


Posted by: Otto von Bisquick | Link to this comment | 07-25-08 7:53 PM
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Posner is utterly predictable. Every law review symposium published since about 1975 has an article by him with the title "_____: an Economic Approach." I think he must just mail merge it at this point.


Posted by: xyzzy | Link to this comment | 07-25-08 7:58 PM
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Women throughout the Internet rend their garments in mourningfutile offering.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 7:59 PM
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Brock--
Dodge v.Ford rests on the idea that a manager can't say "Fuck you, I'm doing what I want with the corporate assets" to the shareholders. That's different from taking it as axiomatic that shareholders necessarily demand sociopathic profit maximizing, which is Posner's claim. Real people managing their own assets are often not profit maxmizing sociopaths; I don't see that there's any reason that a manager whose job is to manage assets as the owner would wish them to must be.


Posted by: LizardBreath | Link to this comment | 07-25-08 8:01 PM
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I used to work at the U of C Law School, and was acquainted with him as a person before he became a judge and I went to law school myself. I've probably read dozens of his opinions, maybe hundreds, and several of his books. Law and Literature, while showing intelligence and certainly industry, did not impress me that much on the whole. The one about sex was more impressive and interesting, particularly his alternative grounds for deciding Griswold—as a 1st Amendment, religious establishment case, not a privacy one—and the way that would have foreclosed the reasoning for Roe v. Wade. His combination of tolerance for sexual deviance with conservative principles was quite respectable.


Posted by: I don't pay | Link to this comment | 07-25-08 8:06 PM
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If the owners are mostly finance people, conglomerates and multinationals and holding companies and shell corporations and pension funds and so on, the fiduciary obligation becomes all-important.

IIRC, "widows and orphans" was a code word for the fiduciary obligation during the XIXc. The idea was that many stockholders were widows and orphans entirely dependent on dividends for their survival.

Widows and orphans also were the people Simon Legree drove from their homes in midwinter. They had a lot of ideological work to do in those days.


Posted by: John Emerson | Link to this comment | 07-25-08 8:07 PM
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Speaking with my plaintiffs' lawyer hat on, the idea that Posner's idea has some sort of purchase in the real world is bizarre, and no one should be under the impression (as I don't think Posner is, although I of course can't read his oceans of material) that Posner's rule above states the law as it exists in practice. I'm pretty sure that Dsquared is aware of this.

In reality, a corporation is perfectly free to do what it wants to in terms of charitable contributions without regard to fear of being sued for a breach of fiduciary duty (the business judgment rule takes care of that completely). The Dodge case (assuming it applies anywhere outside of Michigan) can not only be circumvented with the merest fig-leaf of a gesture towards maximizing shareholder value, but it would almost certainly not come out the same way in Delaware today.

It's true that there's been something of a turn away from good corporate citizenship by large american companies in the past 30 or so years, but that has approximately zero to do with the law of fiduciary duty and approximately everything to do with a globalized economy and the fact that it's easier now culturally and economically to move your corporate headquarters every ten years.


Posted by: Robert Halford | Link to this comment | 07-25-08 8:13 PM
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Looks like I'm pwnd (is that spelled right?) by about six comments above, but don't be fooled: Posner's version of fiduciary duty doesn't reflect the law! Managers are plenty greedy on their own without the law pushing them into greed they don't want to have.


Posted by: Robert Halford | Link to this comment | 07-25-08 8:16 PM
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32:I haven't been following where this chain of posts started, but I'm reasonably certain dsquared's not confused about how a lawsuit would come out. He's disagreeing, as am I, with a claim that the law (or ethical standards) should require corporate officers to follow Posner's rule, And there's a fair number of people who buy into that rule as an ethical ideal, regardless of what the courts of Delaware would enforce, which makes it worth disagreeing with.


Posted by: LizardBreath | Link to this comment | 07-25-08 8:18 PM
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Oh, come on LB. Again, I agree that your reasoning on this question is, in the abstract, better, but that's not what the case held.

"The difference between an
incidental humanitarian expenditure of corporate funds for the benefit of the employes, like
the building of a hospital for their use and the employment of agencies for the betterment of
their condition, and a general purpose and plan to benefit mankind at the expense of others, is
obvious. There should be no confusion (of which there is evidence) of the duties which Mr.
Ford conceives that he and the stockholders owe to the general public and the duties which in
law he and his codirectors owe to protesting, minority stockholders. A business corporation is
organized and carried on primarily for the profit of the stockholders. The powers of the
directors are to be employed for that end. The discretion of directors is to be exercised in the
choice of means to attain that end, and does not extend to a change in the end itself, to the
reduction of profits, or to the nondistribution of profits among stockholders in order to devote
them to other purposes."


Posted by: Brock Landers | Link to this comment | 07-25-08 8:23 PM
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35 to 29


Posted by: | Link to this comment | 07-25-08 8:23 PM
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Posner is an idealist, you see, and isn't trying to be descriptive or legalistic. He just dreams of a world where the fiduciary obligation to make a profit is absolute -- a visionary like MLK, or like the early anti-slavery crusaders during the centuries when slavery was unquestioned.


Posted by: John Emerson | Link to this comment | 07-25-08 8:23 PM
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35: Read the whole case, Brock. It's clearly reacting to Ford's statements that he doesn't need to serve the interests of the shareholders. That's different from stating that the only interest that can possibly be considered is the monetary interest of the shareholders.

And of course, like Halford says, a case coming out like D.v.F. is implausible these days -- you're talking about a case about a century old, because there's not a lot that follows it lately. Corporations do in fact give to charity, and are not successfully sued by minority shareholders for it.


Posted by: LizardBreath | Link to this comment | 07-25-08 8:29 PM
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nor am I disputing that he's full of asinine ideas (to a surprising extent for such a brilliant man),

It is a nice question just how full of asinine ideas one has to be before one's reputation for brilliance (as opposed to productivity) begins to become tarnished.

The rise of the shareholder conception of value (never mind the modern corporation) is a very interesting topic in the sociology of organizations and the social construction of rationality.


Posted by: Gonerill | Link to this comment | 07-25-08 8:35 PM
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It is a nice question just how full of asinine ideas one has to be before one's reputation for brilliance (as opposed to productivity) begins to become tarnished.

Lichtenberg: The great also make mistakes, and some of them make so many you're tempted to think they weren't great after all.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 8:36 PM
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Let me re-phrase: if the question is can shareholders of a large corporation have interests other than pure profit maximization?, the answer yes, of course. And they can express those interests by majority vote through binding bylaw provisions requiring directors to devote some percentage of profits to charity, or to pay attention to environmental stewardship (above and beyond the extent to which doing so might serve to increase profit). Some corporations have these and other similar provisions in their bylaws.

But in the absence of such a formal expression of shareholder interests, the default presumption is that shareholders simply want their managers to maximize corporate profits. And in the absence of formally expressed shareholder opinion, we shouldn't and we aren't going to believe a manager who says he's pursuing some other goal because it's what the shareholders really want.

(It is of course true that the law gives managers very broad discretion to do as they see fit to maximize profits, and as long as what they're doing can plausibly be so categorized the shareholders will be without legal remedy. But that's very different than saying they are permitted to pursue some goal other than corporate profit.)


Posted by: Brock Landers | Link to this comment | 07-25-08 8:37 PM
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Corporations do in fact give to charity, and are not successfully sued by minority shareholders for it.

But isn't this more the result of the courts' getting out of the habit of second-guessing management, rather than really a rejection of the underlying idea that management has a fiduciary duty to maximize value? Nobody today would come out and say, like Ford, that he was spending the company money on the betterment of mankind for the sake of the betterment of mankind (or whatever exactly it was he said). They'd say they were trying to buy some goodwill by doing something nice for a change, so that in the long run they'd create more value for shareholders, and the courts would simply decline to decide whether or not that was truly the right call from a profit-maximizing perspective. I think if management said "we gave all that money to the Met because we really, really like the opera and think some of our shareholders do, too, even though, yeah, it's making a sizeable dent in the bottom line," they'd be fucked. Even if some of the shareholders did really, really like the opera.


Posted by: potchkeh | Link to this comment | 07-25-08 8:39 PM
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34 - Right -- I think you make the point in the main post as well, very nicely, and sorry if that wasn't clear. But I think a few of the commenters seemed to be under the impression that Posner's idea was the law.


Posted by: Robert Halford | Link to this comment | 07-25-08 8:39 PM
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Alternatively, managers can do what they think best and shareholders use established procedures to fire them if they see fit.


Posted by: John Emerson | Link to this comment | 07-25-08 8:40 PM
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Consider, for example, this nice discussion by Frank Dobbin and Dirk Zorn.


Posted by: Gonerill | Link to this comment | 07-25-08 8:44 PM
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38: there's "not a lot that follows it" because there aren't any managers that have since said they were up to anything other than maximizing corporate profits. It doesn't matter what they're doing, they claim it's done to boost shareholder returns.

I think a case coming out like D.v.F. is a certainty these days, if the managers were as bold as Ford was about admitting motives other than profit-maximization.


Posted by: Brock Landers | Link to this comment | 07-25-08 8:44 PM
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the default presumption is that shareholders simply want their managers to maximize corporate profits.

Is that the default presumption when, say, profits would be maximized by building a structure that, while it's up to code, and puts the corporation at no risk of legal liability, in the professional opinion of the managers is unsafe and likely to kill hundreds of people? I'm figuring you'd cut them a break from that default presumption under those circumstances, and let them minimize carnage rather than maximize profits, on the grounds that most shareholders would make the same decision.

So, where are you drawing the line? Managers can guess that shareholders probably don't want to kill people, but they can't guess that shareholders might want to trade off monetary returns for environmentally sound practices? That 'default presumption' really isn't as absolute as Posner wants it to be.


Posted by: LizardBreath | Link to this comment | 07-25-08 8:45 PM
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The observation that you have a duty to X is not identical as the claims that it's obvious how to distinguish X from -X, or that your duty to X cannot in some cases be defeated by contrary claims.

Indeed, it's interesting to note how many of the examples Posner gives (pro-bono law work as a way of attracting talent) mirrors those D^2 sees as powerful objections (the Body Shop needing to give away money to retain their talented CEO). So it does not seem that Posner is at all blind to the difficulty of making these distinctions. If D^2's point is that there are true shades of gray and even in areas approaching the black and white one can always find a justification, then sure, he's right. If the point is that a corporation giving millions to the CEO's college, or other charities tangentially related to their business, shouldn't bear the burden of proof, then he's wrong (unless the agreement with shareholders is of quite an unusual kind).

Consider the question of magnitude. If management spends 50% of the R&D budget on a project that bombs, they may get fired, but the default view will not be that they abused their responsibility to shareholders. If they give the same sum away, in virtually any case, they'd be viewed as abusing their trust. We can imagineer up some scenario where it would be justifiable, but in point of fact this never happens. Why do we think that is?


Posted by: baa | Link to this comment | 07-25-08 8:49 PM
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42 -- Actually, as a practical matter, in Delaware right now, I think that it is overwhelmingly likely that even if the board of directors cut a $ 1 million check to the opera and then issued a statement saying "we aren't doing this to maximize shareholder value, but because it benefits the arts" wouldn't be enough to create a breach of fiduciary duty. But of course since the issue is so easy for any competent lawyer to fig-leaf this will probably never come up before a court.

There are examples, of course, in which a charity is the beneficiary of money obtained through some other breach of fiduciary duty. For example, in the Tyco case, Kozlowski gave some of the money he looted from the corporations to charities (really noble ones, like his Yacht Club). But the breach there was the looting of the company for personal gain, not giving money to a charity because it breached a duty to maximize profit.

This is a totally academic and normative debate, not a debate about actually-existing law.


Posted by: Robert Halford | Link to this comment | 07-25-08 8:50 PM
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47? That's an absurd hypothetical. It "puts the corporation at no risk of legal liability" but in the manager's judgment is "unsafe and likely to kill hundreds of people"? Then in the manager's judgment, it puts the corporation at tremendous risk of legal liability. I expect a court would defer to the manager's judgment there, even of the absolute statement to the contrary were somehow proven "true". But it's still about profit maximization.


Posted by: Brock Landers | Link to this comment | 07-25-08 8:51 PM
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If management spends 50% of the R&D budget on a project that bombs, they may get fired, but the default view will not be that they abused their responsibility to shareholders. If they give the same sum away, in virtually any case, they'd be viewed as abusing their trust.

Surely that depends on the relative size of the R&D budget.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 8:54 PM
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50: Make up your own hypo, unless you think it's inconceivable that management could believe that practices that put people at significant risk of death or injury might have more financial upside than downside in terms of legal liability. There's a lot of meatpacking plants crippling their employees and not suffering for it -- is the default rule that they're required to?


Posted by: LizardBreath | Link to this comment | 07-25-08 8:55 PM
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Isn't the normal fiduciary response to liability risk to buy insurance and not worry about killing people?


Posted by: John Emerson | Link to this comment | 07-25-08 8:55 PM
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50: I think that LB is assuming no paper trail and no email trail. Without them the legal liability is greatly reduced.


Posted by: John Emerson | Link to this comment | 07-25-08 8:57 PM
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The conversation's drifting back and forth between what the obligations of a corporate manager are, and what can be made to stick in court. Brock and everyone else agrees that in court, a manager can do pretty much what they like (short of really blatantly lining their own pockets), and no one's going to secondguess them.

What I think the argument is about is what goals a manager should regard themselves as ethically bound to serve; I don't think an absolute limitation of those goals to profit maximization makes sense.


Posted by: LizardBreath | Link to this comment | 07-25-08 9:01 PM
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48 -- That's at the level of trolley problems, but in the real world, who cares?

It's probably true that in the extreme circumstance which a company gave away 50 percent of its assets for literally no reason, the directors could be held liable for a breach of the duty of care (and probably loyalty, as well, if the charity the directors gave to is related to them, and probably fraud, as well, if they lied about the purpose of their actions). I don't think anyone would argue that a corporation has no duty to its shareholders. But that's quite different from Posner's point about a fiduciary duty to maximize shareholder profits, and Dsquared effectively destroys Posner's argument as a practical matter.


Posted by: Robert Halford | Link to this comment | 07-25-08 9:02 PM
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>Surely that depends on the relative size of the R&D budget.

Yup. If corporate charity remains a sideshow, then no one cares. But it never, at least that I have ever heard, becomes 20% (much less 50%) of a company's effort. Again, I think there's a reason for that.

It's sure true that the principle-agent problem is a hard one to correct. If that's the point, then I agree. I also agree that profit maximization isn't the only standard of behavior for a corporate manager. I don't think Posner argues that executives are obligated to perform piracy on the high seas if they know they won't get caught. Just that the presumption is: your business is to make money for shareholders, not pursue enterprises unrelated to that project.


Posted by: baa | Link to this comment | 07-25-08 9:04 PM
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52: the current precedent says yes, they are required to do so. Or, they are allowed not to do so, if they think that not doing so might conceivably generate enough customer goodwill and/or employee morale to be a profitable long-term strategy. Which is an easy case to make, since the court won't even question it. But they aren't allowed not to cripple people just because they don't enjoy crippling people.

This could certainly come out differently if litigated today, but it hasn't been and likely won't be, at least not for some time. And, for the umpteeth time, I'm not defending this, just pointing out that it is a longstanding axiom of corporate law, not Posner's brainchild.


Posted by: Brock Landers | Link to this comment | 07-25-08 9:06 PM
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58: If you're going to talk about what 'the current precedent' holds, I'd like to see a case from the last forty years that might reasonably be read to stand for the proposition that corporate officers are required to cripple employees where it would be in the financial interests of the corporation, or any more general proposition that would imply it. Holding, not dicta.

If it's not something a court would require (which it's not -- I'm not actually expecting a case cite), saying that it's what the current precedent says doesn't refer to anything concrete.


Posted by: LizardBreath | Link to this comment | 07-25-08 9:11 PM
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55 --

I probably don't disagree with you a matter of pure theory (is a manager always ethically bound to maximize profits? I guess not). However, it's also worth noting that a lot of the reason for imposing a culture of strict "profit maxmization" is to limit the ability of management to loot the corporation or to pick up self-serving perks at the expense of shareholders and other employees (the corporate box at the Opera is a nice way to spend an evening for the CFO and his wife).


Posted by: Robert Halford | Link to this comment | 07-25-08 9:11 PM
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Shouldn't we be making smutty remarks about Mrs. Davies? She must be hurt that we went all corporate-governance on the most wonderful day of her life.


Posted by: John Emerson | Link to this comment | 07-25-08 9:16 PM
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58 --

I'm a plaintiffs lawyer and would love to make some money suing companies that don't mistreat their workers to the maximum extent allowed by law. I'm not kidding. But I don't think there's any case that would conceivably permit me to do so, and so if you know of one, send it to me.


Posted by: Robert Halford | Link to this comment | 07-25-08 9:17 PM
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57: so, in fact, that "in virtually any case" is false.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 9:17 PM
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And it's probably worth noting that Posner's deployment of this phrase came in the context of whether, and how "creative capitalism" is a good idea. Landsberg has useful comments here.

Ben W -- work with me here. The "50% of R+D" example operated under the suppressed premise "in an industry where R+D is a major component of cost." I think if you had a corporation where management donated 50% of profit to charity, or indeed, all of profit to charity, the default assumption would be that they were misbehaving. Do you agree with this? If you do agree, why?


Posted by: baa | Link to this comment | 07-25-08 9:23 PM
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61: Eh, who wants to make comments about someone without an online presence -- there's no way to make them funny in a targeted way. One does wonder if the wedding took place on orders from little Adolf, though,


Posted by: LizardBreath | Link to this comment | 07-25-08 9:25 PM
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Didn't we cover this already in the "cocaine and hookers" bond-rating thread?


Posted by: John Emerson | Link to this comment | 07-25-08 9:28 PM
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This is a totally academic and normative debate, not a debate about actually-existing law.

The two are not disjunct.

There's a lot of meatpacking plants crippling their employees and not suffering for it -- is the default rule that they're required to?

That's the crucial point. Posner is making it respectable for those meat packing plant managers to say "we feel real, real bad about all those undocumented aliens becoming crippled after a few years of working for us at minimum wage, but that's what our fiduciary duty obliges us to do. So it's not like we're bad people or anything". Posner is normalizing sociopathy by making claims about both what the law is and should be, as LB points out.


Posted by: Michael H Schneider | Link to this comment | 07-25-08 9:46 PM
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64 --

Yes, you're right that the reason no corporation gives away half of of its money to charity is that most corporations are established to make money for their shareholders, who own the corporation. So what? If that was Posner's only point, it would be so banal as to be beneath mention.

Posner's point isn't that shareholders need to be attended to (everyone agrees there) but that anything a corporation spent money on that was NOT focused solely on "profit maximization" is an illegitimate breach of a manager's fiduciary duties. But as Dsquared notes, the concept of "profit maximization" is either so narrow as to make this rule totally unworkable and unrealistic or so broad as to fold it into the essentially meaningless "might benefit the shareholder in the future," which would allow for almost any stakeholder-driven decision you can think of.

To the extent he was trying to make an interesting point, Posner's real argument was with those who suggest (the shame!) that there are other stakeholders with a legitimate claim on management's attention -- workers, the environment, a general sense of ethics, etc. The question is whether or not those parties can have any claim at all on the attention of the board of directors. The right answer is that they can, because (a) attending to those other interests doesn't necessarily interfere with "profit maximization", and (b) shareholders themselves may have interests in things other than narrow "profit maximization." There's also point (c), which is that in the real world no Court is going to get involved in sorting out any even remotely plausible business decision.



Posted by: Robert Halford | Link to this comment | 07-25-08 9:50 PM
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Robert, I think if you go back to Posner's short post, you'll see that he makes the point (which is not, in my opinion, a trivial one) that there's a default obligation to maximize profits in the context of a larger discussion of what"creative captialism" can mean, and whether it is advisable. Many of the points made as "contra Posner" he himself grants. He's not trying to stand or fall on 'profit maximisation being uncontroversial to define. He would agree that it is hard to define (or so I read him).


Posted by: baa | Link to this comment | 07-25-08 9:55 PM
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I think if you had a corporation where management donated 50% of profit to charity, or indeed, all of profit to charity, the default assumption would be that they were misbehaving. Do you agree with this? If you do agree, why?

Either course of action would be so exceptional that I would prescind from making an assessment, even preliminarily, until I knew more about why it was taken.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 10:08 PM
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"Exceptional" there is not supposed to have a negative, suspicions-rousing connotation. Just—exceptional.


Posted by: ben w-lfs-n | Link to this comment | 07-25-08 10:08 PM
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Needless to say, I assumed--BECAUSE I AM HETERO-MARRIAGE-NORMATIVE AND EVIL--that the man was already married, what with the kid thing. That'll teach me.

Congrats, D2! Best wishes for many happy years and all that. Do not call your wife a cunt unless you want to sound like John McCain.


Posted by: bitchphd | Link to this comment | 07-25-08 10:45 PM
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However, on reviewing the thread I see that I *am* the only person who bothered to congratulate the man, so at least I'm not a total asshole.


Posted by: bitchphd | Link to this comment | 07-25-08 10:47 PM
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Thou shalt love thy Shareholders. thy Gods, with all thy heart, and with all thy soul, and with all thy mind.
This is the first and great commandment.
And the second is like unto it, Thou shalt love thy board members as thyself.
On these two commandments hang all the law and the profits.


Posted by: | Link to this comment | 07-25-08 11:40 PM
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Oh, and congratulations, condolences, sorry for the sacrilege, as the case may be. And the previous was me.


Posted by: foolishmortal | Link to this comment | 07-25-08 11:45 PM
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69 --

Baa, to be honest, I didn't know that there was a recent Posner essay on this -- I assumed that he was simply aping Milton Friedman's old essay (par for the course for Posner) on the social responsibility of business and that some old essay of Posner's from the 1970s or 80s had been picked up by the blogs for some reason.

With that said, the short post from Posner on the "Creatiive Capitalism" blog is even worse than I thought and is high on the already off the charts "late Posner" incoherence scale. It looks like Posner now acknowledges that he doesn't have a coherent critique of corporate charity, other than personal skepticism about the attractiveness of using corporate charity as a recruiting tool and an unexplained desire that Americans don't spend their money on helping the poor people in Africa (?????)

Look, in my view, if companies want to have a go at helping to make the world a more decent place because they see some intangible PR/recruiting/feel good benefit about it, go for it. The law doesn't stop them now and shouldn't. If the stock price drops as a result or if there is a shareholder revolt, management will pay the price, as management is most definitely well aware.

It's also more than a little suspicious that the same folks who want to reduce SEC oversight, kill off the plaintiffs' bar, and turn what's left of the law of fiduciary duty into a rubber-stamp for CEOs' worst behavior suddenly are passionate advocates for shareholder rights when the possibility arises that a little free cash might be given to poor people. John Emerson is 100% right about this.

(There is the downside of CSR: unbearably smug business school types becoming even more insufferable, because now they can work be "social entrepreneurs" and act as if they're more moral than me, in addition to being richer. But I try not to let my aesthetic resentments get in the way of hoping for more money to cure river blindness).


Posted by: Robert Halford | Link to this comment | 07-26-08 12:41 AM
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shareholders use established procedures to fire them if they see fit

Yeah, because it isn't like the deck is totally stacked against them.


Posted by: Sir Kraab | Link to this comment | 07-26-08 5:58 AM
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Congratulations, dsquared!


Posted by: Sir Kraab | Link to this comment | 07-26-08 6:00 AM
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Is Posner a genius? Because, like many people on this thread, I am fact smarter than he is, so if I'm eligible for the title "genius" I'd like to know. I might put it on my business cards.


Posted by: Walt Someguy | Link to this comment | 07-26-08 6:09 AM
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Do you realize how many "dsquared's baby-mama" jokes we could have made over the years? Why, God, why?


Posted by: Walt Someguy | Link to this comment | 07-26-08 6:19 AM
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Interestingly, another person who agrees with Posner is Noam Chomsky.


Posted by: rob helpy-chalk | Link to this comment | 07-26-08 6:46 AM
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Oh yes, and congratulations D^2.


Posted by: rob helpy-chalk | Link to this comment | 07-26-08 6:48 AM
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If I were to provide a paragraph-to-sentence condensation of Posner it would be:

1. I am uncomfortable with the vague and platitude-filled nature of recent discussions of 'creative capitalism'
2. Many things that look like classical philanthropy can be justified by a profit-increasing motive
3. But these kinds of 'profit-increasing charity' aren't the same as real charity, and creative capitalism often equivocates on this point. 'Charity' which is profit maximizing isn't creative capitalism, it's just capitalism; charity which has no connection to the profit seeking-mission of the company is, essentially, an abuse
4. Perhaps the argument is that companies should perform charity because they are more efficient than non-profits, but this superior efficiency derives largely from their for-profit status.
5. Another source of skepticism is the focus on foreign charity to Africa: the assumption seems to be that that problems in Africa largely derive from lack of resources, but this is poorly supported. If, as I suspect, government failure is a larger cause one should be conscious of the risk that foreign aid can abet government failure.
6. It would be nice to see more attention to empirical studies of what actually works from creative capitalists, aid may have perverse results.
7. Response to Glaeser: It's not true that markets ignore the poor - there's profit to be made in making products for poor people because there are a lot of poor people. The 'truly indigent' are another matter
8. Response to Glaeser: There is no successful track record of corporate charity (as opposed to government and personal), and it seems unlikely that corporate charity will be able to bypass corrupt/failed governments.

One can disagree but this is not nonsense. And given the number of criticisms that could be leveled against Posner, it puzzles me how much of the critique has focused on points he himself grants (e.g., that there are a wide variety of actions that look like philanthropy but could be characterized as profit maximizing).


Posted by: baa | Link to this comment | 07-26-08 7:27 AM
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I assumed dsquared wasn't married, mostly because way back in the day asilon laughed at me for assuming she was, and I realized that middle-class-couple-with-kids-is-married isn't nearly as strong a default in the UK as in the US (not that it's universal here, but it's a pretty strong default). And with that as a baseline, I'd noticed he didn't use 'wife' or 'marriage' talking about his relationship.

Anyway, the intent of the post was to congratulate. I'm sort of curious about why one gets married in the midst of a committed relationship with kids -- is it a relationship event, or more like finally getting something bureaucratic attended to like having wills written?


Posted by: LizardBreath | Link to this comment | 07-26-08 7:31 AM
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Posner is one of the absolute poster children for my theory that a reputation as a genius is more difficult to shake off than a reputation as a goat fucker.

Make up your own hypo, unless you think it's inconceivable that management could believe that practices that put people at significant risk of death or injury might have more financial upside than downside in terms of legal liability

this isn't hypothetical - it's what was at issue in the Ford Pinto case, and nobody but some very silly net.libertarians indeed thinks that the Dodge vs Ford doctrine obliged Ford to do what they did there, any more than it obliges people to run unsafe meatpacking plants or obliged Alfried Krupp to use concentration camp slave labour.

All that happens here is that you raise an example of how a company does something that doesn't in fact maximise shareholder returns, then Posner comes up with a just so story about how, in some convoluted way, this really does maximise their returns in the long term, blah de blah, and then he hopes that nobody notices that this makes his assertion unverifiable and vacuous.

And the children were unbelievably darling. It turns out that, as well as being quite startlingly handsome, Napoleon has really good posture and wears a suit well.


Posted by: dsquared | Link to this comment | 07-26-08 7:33 AM
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84: I actually asked her to marry me about five seconds after Napoleon Adolf was born, so it was always going to happen, but there was no time to organise, and it looked expensive, and things just kind of drifted. Then we just decided to get our act together this year because we'd worked out how to organise the whole thing so it was more of a party and less of a whole great big ceremonial thing - we bought some ungodly amount of champagne and oysters and had a beach party.

The immediate catalyst was that the darling Tess saw an antique lace Goth dress in Camden Market that she really wanted but couldn't otherwise justify the cost of.


Posted by: dsquared | Link to this comment | 07-26-08 7:37 AM
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The Chicago school has spent 60 years or so explaining that profit-seeking behavior is wonderful and good, whereas all other forms of behavior are dubious, probably harmful, and really just defective, bad forms of profit-seeking. As has been pointed out, Posner's piece is just a regurgitation of Friedman, who also was willing to say the same thing over and over again.

Most of us have gotten the joke by now and are tired of it, especially because it's not really true the way they say it. In my case it's just amusing to see someone who's usually pretty snarky and positivistic get pious, using a term ("fiduciary obligation") that looks like it came from the Ten Commandments, the Lord's Prayer, the Gettysburg Address, the Bill of Rights, or somewhere noble like that.


Posted by: John Emerson | Link to this comment | 07-26-08 7:38 AM
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It is pretty funny, particularly when you realise that according to the Chicago School every single person in the world is a venal, selfish sociopath out for all they can get, with only two exceptions; corporate CEOs who selflessly serve their duty to shareholders and Chicago School economists, who care only about the truth.


Posted by: dsquared | Link to this comment | 07-26-08 7:46 AM
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Baa-

4, in your list, is I think a particular weak spot -- the example Posner relies on is some airline running a money-losing flight to an African country, and asking why isn't it better for the airline to maximize its profits, give the money to shareholders, and then let them give the money to the African country if they feel like it. The obvious answer is that an airline can probably run a money-losing flight cheaper than one can be hired: almost no organization runs at 100% efficiency, and there are underutilized resources that can be diverted.

From my own experience, my husband is a computer journalist, and knows a lot of people in the industry. Companies often have computers sitting around that aren't worth much on the open market -- they're obsolete to the point where no one would buy them, but they're still perfectly useful. And so Buck's managed to mooch computers for our school on various occasions, that would have cost thousands for the school to buy equivalents for, but didn't cost the companies anything like that much to give away.

Now, the profit-maximizing thing to do would be to sell everything, rather than giving it away. But by giving stuff away, a company is doing much more good at a much lower cost than they would by maximizing their profits and letting the shareholders engage in their own charities. The efficiency gain isn't necessarily about some general superiority of corporations over charities, but about specific areas where corporations have underutilized resources and expertise that can be turned to charitable effect more efficiently than they can be monetized.


Posted by: LizardBreath | Link to this comment | 07-26-08 7:48 AM
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86: Oh, that sounds as if it must have been gorgeous. Little boys in suits are great -- put Newt in a jacket with a button-down shirt and by the end of the evening he's F. Scott Fitzgerald after a night on the town: dissipated, but still fetching.


Posted by: LizardBreath | Link to this comment | 07-26-08 7:52 AM
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I would tend to agree that examples of true corporate efficiency can be found. E.g., Wal Mart delivering food post Katrina. I was just trying to outline Posner, not supporting him. [the airline example is Landsberg's, I think].

I feel the alleged impossibility of defining profit-seeking behavior is both true but largely beside the point. Sure, it's hard to tell, we can always find a way to justify, etc. But it's not like we don't have a decent model of profit-seeking behavior as a general way of evaluating the behavior of corporate manager. I think most fund LPs have a pretty good idea of what would count, and "we gave 20% of investor capital to Oxfam because in 20 years it will lead to a richer world!" would be a tough sell.

At a low level, no one cares about corporate charity. It's a rounding error. At larger levels (which is what 'creative capitalism' seems to suggest) it's pretty confusing and I think runs the risk of real principal-agent problems. I do tend to agree -- as LB suggest -- that if it's easy to use infrastructure you have in place to help, great.


Posted by: baa | Link to this comment | 07-26-08 8:01 AM
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At that point, Posner's arguments get kind of empty, don't they? Managers have a fiduciary obligation to maximize profits rather than do good*.

* Although in practice it's impossible to draw a bright line between maximizing profits and doing good, and sometimes unambiguously doing good really is a good idea.

The "fiduciary obligation" language is the kind of oversimplification that obscures more than it clarifies.


Posted by: LizardBreath | Link to this comment | 07-26-08 8:05 AM
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In other news, the Wild Monkey diner is closed. A blow to shareholders, no doubt.


Posted by: | Link to this comment | 07-26-08 8:45 AM
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somewhere noble like that

Wood v. Lucy, Lady Duff-Gordon.


Posted by: Napi | Link to this comment | 07-26-08 8:51 AM
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Not really exactly, but close enough.


Posted by: Napi | Link to this comment | 07-26-08 8:52 AM
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Interestingly, another person who agrees with Posner is Noam Chomsky.

Yeah, not to iimpute the ideology to Chomsky who I think describes himself as anarchist or left-libertarian (like me, only sane) but non-profit maximising capitalists would be a problem for Marxists, if such a implausible thing could exist.

I read everything, including the Dodge v Ford entire. I'm just messing. Mostly.

Congratulations, d2


Posted by: bob mcmanus | Link to this comment | 07-26-08 8:56 AM
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Now, the profit-maximizing thing to do would be to sell everything, rather than giving it away

This may not be true for computers. Especially if they are old enough that selling them would be hard. Where I work we try and give computer stuff away because they have to be disposed of as hazardous waste which makes getting rid of them on a large scale quite expensive.


Posted by: CJB | Link to this comment | 07-26-08 8:57 AM
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96 non profit-maximising? screw it


Posted by: bob mcmanus | Link to this comment | 07-26-08 8:57 AM
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Shoot, I was thinking of Meinhard v. Salmon. The whole punctilio bit.

Not as good as surviving the Titanic, or inventing the runway fashion show . . .


Posted by: Napi | Link to this comment | 07-26-08 8:58 AM
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Lucy, Lady Duff-Gordon sounds like she should be an action hero, a villainess, or a porn star.


Posted by: John Emerson | Link to this comment | 07-26-08 8:58 AM
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On the Titanic, she actually was a villainess. She also seems to have been ahead of her time in monetizing social class.


Posted by: John Emerson | Link to this comment | 07-26-08 9:01 AM
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Meinhard v. Salmon

The bestialist's Lawrence v. Texas?


Posted by: JP Stormcrow | Link to this comment | 07-26-08 9:30 AM
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I'm having difficulty envisioning a D-squared marriage without many interruptions for him to loudly debunk some ridiculous element of the ceremony. Of course, that's because I only know him as the internet master of intellectual Tourette's.

It's true that there's been something of a turn away from good corporate citizenship by large american companies in the past 30 or so years, but that has approximately zero to do with the law of fiduciary duty and approximately everything to do with a globalized economy

The point is the role of "fiduciary duty" as an ideological justification for being a bad citizen. Social norms are meaningful, even in the market. There are plenty of perfectly local, non-globalized corporations putting this B-school ideology into action and milking every last cent of profit.

That was a point made in the CT thread -- that d-squared is basically bringing up an empirical objection to a normative argument. The empirical uncertainty of what will actually maximize shareholder value is less important than the general idea of maximizing stock price as the proper goal for managers.


Posted by: PGD | Link to this comment | 07-26-08 11:01 AM
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Lucy, Lady Duff-Gordon sounds like she should be an action hero, a villainess, or a porn star a character in an Oscar Wilde play.


Posted by: Merganser | Link to this comment | 07-26-08 12:34 PM
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Legal arguments aside, it is certainly not surprising that there continues to be churn in the views of how the world should treat these incredibly interesting and rapidly evolving social institutions that have grown to be such a force over a relatively short period of historical time. (And it was interesting to see dsquared immediately follow with a post on religion the big institutional loser over a similar time frame.)

That said I do have some sympathy with the "stick with the narrow definition of profits" norm if only to keep the focus on what these beasts actually are and help people set laws and controls that are appropriate for the sociopathic nature inherent in an only-money-counts organization. But I think that fails both the Ford Pinto test and ignores that "Corporations are made up of people!" (and not just CEOs).

I await PZ Meyers's "It's only a corporate logo desecration event."


Posted by: JP Stormcrow | Link to this comment | 07-26-08 1:09 PM
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Congratulations dsquared! The economy thanks you!


Posted by: will | Link to this comment | 07-27-08 11:09 PM
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The evolving 'capital lock-in' theory of corporations takes this a big step further, and argues that the reason that corporations emerged as the dominant institution for business (over partnerships) is that they prevent capital providers from removing capital any time it is advantageous. Otherwise firms couldn't enter into implicit agreements (where an explicit contract can't be written and some trust of future commitments is required), and many important joint investments could not happen.

Thus, the whole reason for the institution of the corporation is to prevent short-term shareholder maximization so that longer-term joint projects might be pursued.

Lynn Stout (UCLA) and Margaret Blair (Vanderbilt) have been arguing this in a bunch of law review articles and books, with some good historical detail from the 19th century. One argument they use is that any firm that wants to could write shareholder maximization into its bylaws and yet there is no known example of a firm doing this. It would be economically inefficient.


Posted by: spaz | Link to this comment | 07-28-08 11:57 AM
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The empirical uncertainty of what will actually maximize shareholder value is less important than the general idea of maximizing stock price as the proper goal for managers.

If the empirical uncertainty of something is equivalent to chance, normative arguments about become essentially meaningless. Surely there is some reduction in the value & priority of any such statements as the uncertainty increases.


Posted by: soup biscuit | Link to this comment | 07-28-08 12:01 PM
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