John C. Coffee Jr.: Boards can recognize that their shareholders have needs beyond financial wealth maximization. Making corporate boards representative and diverse works better than co-determination or implied fiduciary duties to everyone.


Editor’s note: To mark the 50-year anniversary of Milton Friedman’s influential NYT piece on the social responsibility of business, we are launching a series of articles on the shareholder-stakeholder debate. Read previous installments here.

Milton Friedman never wrote more influential words than his short op-ed on the social responsibility of corporations in the New York Times Magazine in 1970. But what he said and how he is read by some differ significantly.

Friedman emphasized that the corporation had to play by the rules of the game. Thus, he would not allow—as some of his disciples have argued—a corporation to knowingly violate the law if it saw benefits from the crime that exceeded the maximum penalties authorized by law. What is wrong with recognizing that crime can pay? Here, the key assertion is that corporations receive limited liability from the state in return for accepting some obligations (including law compliance). 

Does this mean that the state can impose duties on corporations toward stakeholders? Yes, beyond doubt, if the state acts lawfully and with requisite clarity. But beyond state-imposed duties, can a corporate board recognize duties that will restrict shareholder wealth maximization? Here, we enter a gray zone, but I would say that boards can recognize that their shareholders have needs beyond financial wealth maximization. If the board maximized profits, but polluted the earth or aggressively advanced irreparable climate change, they have not served their shareholders well. Almost certainly, even their shareholders would want such externalities curbed.  

Does this mean that boards owe a fiduciary duty to stakeholders? This is a legal contradiction in terms: by definition, a fiduciary owes a duty of undivided loyalty to his beneficiaries, and one cannot owe such a duty to natural adversaries. What, then, is the answer? Some European countries believe in co-determination, under which employees and possibly other groups elect directors along with shareholders. But this has proven rigid. The better answer may be broadly representative and diverse boards that are sensitive to the corporation’s impact on others and the political repercussions that will be risked.

The traditional justification for shareholder wealth maximization as the goal of corporate law is that shareholders, as the residual risk bearers, make more efficient decisions. Perhaps, but this is circular if the efficient decision is the one that maximizes shareholder wealth. Assume a case where the decision would make $1 million for shareholders, but impose costs of $100 million on laid off employees. Socially, this is a disaster, but this is a decision that a broadly representative board would not make. Making the board representative and diverse works better than co-determination or implied fiduciary duties to everyone.