I know the board has some fiduciary duty, but can a company put some guardrails on it when they go public, like saying the environment will always come first, or employees or customers or something?
Company law varies depending on local law. There is no general answer to this that is broadly or even approximately applicable on an international level.
In the United States, however, some states allow a company to be registered as a benefit corporation which allows for “the good of society” to be regarded as part of the company’s best interest, in addition to profit. Among these states is Delaware, which is where the vast majority of large American companies are registered.
Edit: To add, American company law generally abides by the principle of “no harm, no foul”. A company’s directors can make decisions that aren’t necessarily the most profitable if its shareholders are okay with those decisions. As an example, the hamburger chain In-N-Out Burger pays its employees the highest wages and gives them among the best benefits in the fast-food industry, and they refuse to do franchising. This probably isn’t the most profitable way to run their business, but since the shareholders, the one family that owns the entire business, are okay with it, that’s how the company is run.
What this means is that you can simply give shares to the people you want to benefit, and in doing so, you could argue that you are working in the best interests of those shareholders. For example, credit unions in the USA, which are essentially not-for-profit banks, give shares to every one of their customers, who are required to purchase one and only one nominal share (usually valued at $5) to open an account. This share is non-transferrable and is redeemed and their “investment” is refunded when they close their last account. The entirety of a credit union’s shares are issued this way, so each customer has one and only one share. In that way, when the directors keep fees low and interest paid high, they can’t be argued to be breaching their fiduciary duty, because their customers are all also sharehholders.
This probably isn’t the most profitable way to run their business, but since the shareholders, the one family that owns the entire business, are okay with it, that’s how the company is run.
This is why we often see privately owned companies making better long term decisions compared to publicly traded companies.
God I love credit unions.
Are they at all similar to building societies?
Credit unions are the American equivalent of building societies. Building societies have a historic emphasis on mortgages (hence their name) but over time have morphed into de facto banks after legislation passed in the 1980s. Credit unions in America have always started out as thrift and lending institutions and so their evolution into what they are today was more natural than how building societies came to be in the UK. However, credit union membership was initially much more restricted.
There is, however, one interesting difference. In the UK, building societies are permitted to “demutualise” and convert themselves into regular limited companies. When this happens, the members receive shares in the new company and it is then operated like any other company. In the United States, this is not allowed. There is no process for a credit union to convert into a for-profit entity.
Credit unions in the US grew a lot once the US federal government started issuing federal credit union charters that had lax membership requirements. Originally, credit union members had to share some common bond. Thus, it was common to find credit unions attached to trade unions or employers or heavily localised (such as to a single farming community). For example, the largest credit union in America, Navy Federal Credit Union, had a strict membership requirement wherein only servicemembers, retired servicemembers, and their family were allowed to be members. Many credit unions today have only nominal membership requirements (e.g. live within 100 miles of a branch or something else to that effect) and thus almost anyone can join.
Edit: I would like to add that credit unions are not a uniquely American phenomenon, nor did they originate from the US, but credit unions are quite popular in the US. Similarly, neither are building societies restricted to the UK.
I mean… I don’t know?
Yes, it looks like it.
In the case of the credit union, why even have shares?
Legally speaking, shares determine ownership of a business entity. An entity must have one or more owners. If nobody owns something, then the State owns it. This is called “escheat”. So the shares prevent that.
A law could be enacted that would eliminate the need for shares in credit unions, but so far, that hasn’t been done, at least not in my home state of Oregon. Again, laws vary.
Yeah fiduciary obligation comes before everything else.
Wasn’t always that thing, companies used to be able to use what was called the 1 2 3 rule, meaning their priorities were to 1) the customers, 2) the employees, and 3) the investors.
However neoliberalism came along and now investors will be calling lawyers if the customer or employee factors in at all save for calculating how much you can screw them over before you’re facing a boycott or strike.
Where this comes from is the fact that companies have to act in the best interest of their shareholders. Best interest isn’t defined in law. But it basically comes down to businesses can’t act against their shareholders by intentionally helping the competition, or something like that. For example if the board members all own stock in a competing business, and they make a decision that will intentionally negatively effect the business in order to help the other company they hold interest in, that would be illegal.
But people mistakes that for businesses being required to maximize profits at all costs, which just isn’t true
Also if the shareholders vote for policy X, the company cannot work against policy X or ignore policy X.
If your shareholders all get together and vote for some policy or program that will DEFINITELY hurt the stock value… well, the company still has to do it because it obeys the shareholders. And it has to try and do it the best possible way – malicious compliance/bad faith can also potentially get you in trouble.
But since the majority shareholders in, frankly, most meaningful public companies are the likes of hedge funds, then the majority of votes are always going to be to do the thing that boosts share value. This inhuman corporate concepts simply cannot care about anything other than more dollars. On the rare occasion where they may try, it gets labeled as ESG wokism and they get threatened legally by conservative governors (at least in the US).
The real problem with shareholder capitalism may be the terrible influence of hedge funds and professional investors rather than the fundamental principle of the investor-based system. But the hedge fund and professional investor is also a kind of natural consequence of these systems.
Also if the shareholders vote for policy X, the company cannot work against policy X or ignore policy X.
This isn’t really true. And is actually exactly what the law is meant to protect. The 51% owner isn’t allowed to purposely tank the company and screw over the other 49% just because they vote.
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It also has been unhelpful in the current arc that with unions being decimated (literally 1/10thed) in the last 60 years and wealth vastly concentrated (gee, wonder if there is a correlation?) it’s allowed very few individuals with massive share interests essentially drive all decision to the “profits at all costs or I’ll replace you and the board”. As wealthy shareholder concentration has spread amongst industries and the wealth concentration snowball has picked up steam you now have a tiny portion of people holding some ungodly percentage of outstanding shares–even relative to other wealth in society.
Interestingly, with the rise of 401ks(crammed down throats of americans to subvert pensions), institutional shareholders (blackrock, vanguard, etc.) these mutual fund and index owners own a massive portion of outstanding wealth and actually have the abilty, should they be pushed to do so, to drive change on all these things. Surprisingly, they haven’t stood up and done it and wealthy rats are scrambling to try to pass anti-activist shareholder rules. Remember, shareholder activists are only bad when it’s the poors, otherwise it’s a brilliant businessperson.
No. They can be sued for the opposite too. Generally it’s about misleading the shareholders. You can argue that it’s about money in the end because who will buy planes that fall out of the sky?
NEW YORK, Jan 31 (Reuters) - Boeing (BA.N), has been sued by shareholders who said the company prioritized profit over safety and misled them about its commitment to making safe aircraft, prior to the Jan. 5 mid-air cabin panel blowout on an Alaskan Airlines 737 MAX 9.
That lawsuit isn’t about Boeing prioritizing profit, it’s about mismanagement tanking their investments in the long term. Also lying.
They don’t even need to involve an outside party at all: they can just replace the uncooperative CEO at any time for someone else who will play ball.
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Yes, many details missing in my one-sentence reply, like how the particular contract is worded, but that is the gist. e.g. the board could vote “from now on the position of CEO shall have no power…”. But I am no expert in contract law so I don’t want to go any deeper than that!:-)
Companies can put guardrails on their strategy at nearly any time. Many do, albeit in a less formal/required fashion. You often see companies embrace a culture or idea, such as charity. A big one lately has been to embrace LGBTQ+ communities, although many of these are seen as hollow allegiance for profit.
The big thing is that they have to act on their shareholders’ behalf in good faith. This means they can’t intentionally tank the company. It also means there’s restrictions on how they can invest in the stock market, and are otherwise restricted on matters that may create a conflict of interest.
No, Goodwill can even be entered on the balance sheet.
Generally it takes extreme (usually fraudulent) behaviour for it to be an issue to shareholders, and for that to stand up in court.
Whereas for strategic decisions (like employee remuneration, environmental investments, etc.), the dissenting shareholders should try to take over the board if there are enough of them.
Timeline is a critical factor, but quarterly reports culture makes most companies suck at long term stability and profitability without privateering (legal piracy) and exploitation. Like, profitable when. I may need to spend a ton of money, retool, and take a hit for the next 2 years, but then I can cut my costs in half. That wouldn’t be impossible to pull off, but what if I can confidently predict 10 or 20 years in the future.
I think the trouble with employee protections and the environment is that humans are only semi-sentient entities. We are not capable of managing both big and small scales at the same time.
I struggled with this when I went from managing inventory for a single bicycle shop to a chain of 3. Each store had its own little niche and I needed to know each of the key sales staff too. Then I had to try and spend a couple million dollars based on what I was willing to gamble on selling next year when I made preseason order commitments. Every single year and large order was putting the entire company on the line. The bigger this gets and the more money is on the line, the harder it is to consider the fractal interests that are near the bottom of the chain.
Like with the bike shops, I had nothing to do with people management or the sales teams. I worked completely in the background like one of the owners. This is a necessary disconnect, but it is this big-decision maker culture that has gone awry with no profit sharing. Like it is amazing what people can infer and use to make strategic guesses that keep a company afloat, and this is why they are getting paid so much for their results. It is easy to think of a business as some kind of stable thing that will always be and is just channeling money around in ‘ways’, but when you’re sitting in the back office, it feels like you’re going to Vegas, know the odds are stacked against you, and your existence relies on betting big on something you are likely to lose at.
The real problem is cultural. When that bet pays off, the gambler must feel indebted to the real people that were part of making it possible.
Profit is profit. Maximizing isn’t mandatory, it’s greed
Actually it is mandatory. That I think is the problem. It is litterally illegal to not try and maximize profits. My question is, can they change that with something written up during the ipo.
Source? It’s often repeated, but I’ve not seen anything official
Read through the rest of the comments here. It is a little more nuanced than I originally thought, but to some degree it is true. They have a fiduciary responsibility to the shareholders. But not taking an action to max profits seems to be technically okay. Taking an action to knowingly reduce profits seems to not be ok.
They could, they just don’t, especially not when doing an IPO. Any company that claims this is often using a legal loophole for some reason or another. The Pantagonia dude “giving away” his 3 billion dollar business to charity was to avoid hundreds of millions in taxes and to gift it all to their children as inheritance.
Companies doing an IPO are not public companies (yet)
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