Are Corporations Required to “Maximize Profits”??
You hear people say it all the time when they get into discussions about corporate power and how to change the system: “Corporations are required by law to maximize profits.”
The assumption is that the view so famously articulated by Milton Friedman — that “the social responsibility of business is to increase its profits” — is actually embedded in the corporate DNA, i.e. a condition of law. But that’s a myth.
“This was not and is not the law,” M. Todd Henderson of the Law and Economics program at the U. of Chicago reminds us. “Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate.”
The source of much confusion comes from the legal profession itself — from the misplaced assumption that the legal authority for maximizing profits was created by the Michigan Supreme Court in Dodge V. Ford .
But as Prof. Lynn Stout suggests in her paper, “Why We Should Stop Teaching Dodge v Ford, that’s a misreading of the case. And as activists and lawyers, we should stop assuming that the norm was created by law, an assumption that erects a barrier to understanding the nature of corporations as legal entities.