Would He Endorse Hobby Lobby?
The Hobby Lobby decision has predictably resulted in a stream of academic commentary and punditry in the blogosphere, much of it addressing the Court's determination that business corporations are RFRA persons capable of exercising religion. For instance, two thoughtful scholars, Usha Rodrigues and Lyman Johnson, have opined that Hobby Lobby rejects the view that corporations should maximize shareholder profits in favor of so-called "Corporate Social Responsibility." Both scholars focus on the same passage of the decision, which Professor Rodrigues quotes in full in her post over at the blog Conglomerate. (For Professor Johnson's views, go here.)
"Some lower court judges have suggested that RFRA does not protect for-profit corporations because the purpose of such corporations is simply to make money. This argument flies in the face of modern corporate law. “Each American jurisdiction today either expressly or by implication authorizes corporations to be formed under its general corporation act for any lawful purpose or business.” 1 J. Cox & T. Hazen, Treatise of the Law of Corporations §4:1, p. 224 (3d ed. 2010) (emphasis added); see 1A W. Fletcher, Cyclopedia of the Law of Corporations §102 (rev. ed. 2010). While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well."
Professor Rodrigues reads this passage as reflecting a rejection of the profit maximization norm in favor of Corporate Social Responsibility. As she puts it:
"Shareholder wealth maximization does not rule with the majority, that's for sure. Milton Friedman be damned, CSR is alive and well on the Supreme Court." Later in her post she concludes that: "the conservative majority [in Hobby Lobby] moves to embrace progressive CSR-style rhetoric[.]"
Speaking of the same passage, Professor Johnson opines as follows:
"[T]hose in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. . . . i.e., the U.S. Supreme Court. Time to change the syllabus on corporate purpose… To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note: you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose."
Nobel Laureate Milton Friedman (pictured above), of course, famously contended that corporations should reject Corporate Social Responsibility, which he defined as the sacrifice of shareholder profits in favor of broader social objectives. In his classic work "Capitalism and Freedom" (1962) Friedman opined as follows on the question:
"[T]here is one and only one social responsibility of business --- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
Friedman repeated this assertion in a 1970 essay in the New York Times Magazine, where he elaborated his views of the subject. (See here).
Both posts are thoughtful efforts to understand the role of Corporate Social Responsibility in the Court's thinking. There does seem to be some tension between the views of Professor Friedman and others (including this blogger) who believe that corporations should maximize shareholder profits, on the one hand, and the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke. (See this essay contending that corporate law is best understood as requiring managers to maximize shareholder profits at the expense of other constituencies when necessary.)
At the same time, I'd like to suggest that the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke is entirely consistent with the views of Friedman and those like myself who believe in shareholder primacy and a background profit maximization norm. It is important to note that the passage in question twice qualifies the Court's assertion that corporations may forgo profits in pursuit other objectives. For instance, the Court states that many for-profit corporations pursue charitable causes "with ownership approval." (emphasis added) Moreover, the Court states that "so long as the owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires." (emphasis added) Thus, as Stephen Bainbridge has suggested in response to Professor Johnson's post, this passage does not abandon profit maximization but instead treats the profit-maximization norm as a default rule, which shareholders may alter so as to pursue objectives that reduce profits.
This "default rule" account is well-grounded in corporate law. As this blogger and co-author Nate Oman explained in a recent essay:
"Religiously motivated decisions may sometimes increase profits, though some such decisions may reduce them. While some case law [e.g., Dodge], suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules. No decision of which we are aware holds that managers must maximize profit over the unanimous objection of the shareholders, who can amend the charter to validate any such choice. Indeed, corporate law even empowers shareholders, by unanimous vote, to ratify alleged corporate waste."
See Alan J. Meese and Nathan B. Oman, Hobby Lobby, Corporate Law and the Theory of the Firm: Why For-Profit Corporations are RFRA Persons, 127 Harv. L. Rev. Forum 273, 284-85 (May 2014).
What, though, about Friedman's wholesale rejection of Corporate Social Responsibility? Doesn't Hobby Lobby's recognition that corporations may forgo profits (albeit only after shareholder approval) necessarily contradict Friedman's view? The answer, I think, is "no." A careful reading of his 1970 essay reveals that Friedman directed his admonition to directors and managers, not shareholders. As Friedman put it, "the manager is the agent of the individuals who own the corporation." Forsaking profits in favor of social goals, Friedman said, contravened the requirements of faithful agency and rendered the manager a principal instead of an agent. As Friedman put it: "[t]he whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interest of his principal. This justification disappears when the corporate executive imposes taxes [i.e., diverts profits away from shareholders] and spends the proceeds for 'social' purposes.").
Indeed, it is worth quoting a lengthy portion of Friedman's 1970 essay in full:
"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services. In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined."
Professor Rodrigues reads this passage as reflecting a rejection of the profit maximization norm in favor of Corporate Social Responsibility. As she puts it:
"Shareholder wealth maximization does not rule with the majority, that's for sure. Milton Friedman be damned, CSR is alive and well on the Supreme Court." Later in her post she concludes that: "the conservative majority [in Hobby Lobby] moves to embrace progressive CSR-style rhetoric[.]"
Speaking of the same passage, Professor Johnson opines as follows:
"[T]hose in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. . . . i.e., the U.S. Supreme Court. Time to change the syllabus on corporate purpose… To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note: you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose."
Nobel Laureate Milton Friedman (pictured above), of course, famously contended that corporations should reject Corporate Social Responsibility, which he defined as the sacrifice of shareholder profits in favor of broader social objectives. In his classic work "Capitalism and Freedom" (1962) Friedman opined as follows on the question:
"[T]here is one and only one social responsibility of business --- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
Friedman repeated this assertion in a 1970 essay in the New York Times Magazine, where he elaborated his views of the subject. (See here).
Both posts are thoughtful efforts to understand the role of Corporate Social Responsibility in the Court's thinking. There does seem to be some tension between the views of Professor Friedman and others (including this blogger) who believe that corporations should maximize shareholder profits, on the one hand, and the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke. (See this essay contending that corporate law is best understood as requiring managers to maximize shareholder profits at the expense of other constituencies when necessary.)
At the same time, I'd like to suggest that the excerpt from Hobby Lobby that Professors Rodrigues and Johnson invoke is entirely consistent with the views of Friedman and those like myself who believe in shareholder primacy and a background profit maximization norm. It is important to note that the passage in question twice qualifies the Court's assertion that corporations may forgo profits in pursuit other objectives. For instance, the Court states that many for-profit corporations pursue charitable causes "with ownership approval." (emphasis added) Moreover, the Court states that "so long as the owners agree, a for-profit corporation may take costly pollution-control and energy-conservation measures that go beyond what the law requires." (emphasis added) Thus, as Stephen Bainbridge has suggested in response to Professor Johnson's post, this passage does not abandon profit maximization but instead treats the profit-maximization norm as a default rule, which shareholders may alter so as to pursue objectives that reduce profits.
This "default rule" account is well-grounded in corporate law. As this blogger and co-author Nate Oman explained in a recent essay:
"Religiously motivated decisions may sometimes increase profits, though some such decisions may reduce them. While some case law [e.g., Dodge], suggests that fiduciaries must unalterably maximize shareholder profits, we believe that shareholders can waive any such rule, like other default rules. No decision of which we are aware holds that managers must maximize profit over the unanimous objection of the shareholders, who can amend the charter to validate any such choice. Indeed, corporate law even empowers shareholders, by unanimous vote, to ratify alleged corporate waste."
See Alan J. Meese and Nathan B. Oman, Hobby Lobby, Corporate Law and the Theory of the Firm: Why For-Profit Corporations are RFRA Persons, 127 Harv. L. Rev. Forum 273, 284-85 (May 2014).
What, though, about Friedman's wholesale rejection of Corporate Social Responsibility? Doesn't Hobby Lobby's recognition that corporations may forgo profits (albeit only after shareholder approval) necessarily contradict Friedman's view? The answer, I think, is "no." A careful reading of his 1970 essay reveals that Friedman directed his admonition to directors and managers, not shareholders. As Friedman put it, "the manager is the agent of the individuals who own the corporation." Forsaking profits in favor of social goals, Friedman said, contravened the requirements of faithful agency and rendered the manager a principal instead of an agent. As Friedman put it: "[t]he whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interest of his principal. This justification disappears when the corporate executive imposes taxes [i.e., diverts profits away from shareholders] and spends the proceeds for 'social' purposes.").
Indeed, it is worth quoting a lengthy portion of Friedman's 1970 essay in full:
"In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services. In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. Needless to say, this does not mean that it is easy to judge how well he is performing his task. But at least the criterion of performance is straightforward, and the persons among whom a voluntary contractual arrangement exists are clearly defined."
It seems clear, then, that Friedman would be comfortable allowing shareholders --- the "principals" who "employ" managers --- to alter the default profit-maximization norm, so long as courts could assure themselves that shareholders really did consent to such a modification. If those who create enterprises can forgo the profit motive altogether, then they can also choose some combination of profit and other objectives. While such a modification of the profit maximization norm would reduce shareholder profits, the modification would presumably enhance shareholder utility. Put another way, the profit-maximization norm is not an end in itself, but instead a means of maximizing shareholder welfare, which may consist of values other than material wealth. Indeed, in the same essay, Friedman expressly stated that "individual proprietors" should feel perfectly free to forgo profit in favor of other objectives. As he put it:
"The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his 'social responsibility,' he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so."
One doubts that Friedman would treat closely held corporations like Hobby Lobby any differently from firms owned by such "individual proprietors." In each case the same individuals both own and control the firm in question, with the result that the agency problem that Friedman identified would disappear. Allowing shareholders of a closely held corporation to pursue certain objectives that reduce profits would thus seem indistinguishable from "allowing" individuals to give money to charity. Both practices would reduce the material wealth of the donor or shareholder, but both would also presumably increase such individuals' utility. Thus, shareholder-approved departures from profit maximization of the sort invoked by the Hobby Lobby majority do not, in my view, reflect a rejection of Friedman's views or an embrace of Corporate Social Responsibility.
"The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his 'social responsibility,' he is spending his own money, not someone else's. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so."
One doubts that Friedman would treat closely held corporations like Hobby Lobby any differently from firms owned by such "individual proprietors." In each case the same individuals both own and control the firm in question, with the result that the agency problem that Friedman identified would disappear. Allowing shareholders of a closely held corporation to pursue certain objectives that reduce profits would thus seem indistinguishable from "allowing" individuals to give money to charity. Both practices would reduce the material wealth of the donor or shareholder, but both would also presumably increase such individuals' utility. Thus, shareholder-approved departures from profit maximization of the sort invoked by the Hobby Lobby majority do not, in my view, reflect a rejection of Friedman's views or an embrace of Corporate Social Responsibility.
