U.S. Corporate Governance, Part II: Inside the Invisible Individual

I left the last post by writing that the corporation's duty is to maximize profit.It is unfair to term it thusly because it makes the corporation sound like a heartless generator of nothing but money.Of course, people work in and ultimately control the corporation and as we know that people are not heartless machines, a paradox seems evident. However, it is completely accurate to say that the one responsibility of a corporation is to maximize profit.The board is responsible as a steward over the investment of the shareholders to maximize their investment.The directors of a corporation owe a fiduciary duty, not to any other person, but to the corporation itself. We already know that technically means to the shareholders so in some sense, that is to other people, but the ultimate responsibility they owe is to the company. All other interests or considerations for anyone acting as a fiduciary are secondary to the duty that director owes to the company itself.

Let me illustrate with a common if not incendiary example. Imagine a chemical corporation in the operation of its business model produces by products that it must dispose. It has two options: 1.) ship it to a chemical waste dump 400 miles away, or 2.) dump it into the local river. The first option is expensive; the second, cheap. We know that the duty of the board is to make the most money possible. So the decision is not a difficult one considering that none of the directors will be liable for any wrongdoing. There are exceptions for this which are so narrow that they are rarely applicable, and of course, the business judgment rule almost always gives the officers and directors "get out of jail free" status.

At most the corporation will have to pay some sort of fine for the violation, if they are caught at all. Therein lies the truly frightening aspect: if the directors and officers determine it is less expensive simply to dump into the river and pay the fine than it would be to ship the by-products to the disposal site, there really isn't much of a decision to make. If that chemical eventually kills someone, it isn't murder. It's the cost of doing business and it is a completely acceptable, if not encouraged tactic under U.S. Corporate Governance.

Tags: business judgment rule, corporations, corporate governance, fiduciary duty