If investors feel that profit is not being maximized, they can sue or take other actions to punish those they see as not focusing on profit etc.
I mean, the point is that "you aren't prioritizing profit" has legal standing for investors. And "we don't prioritize profit in cases that involve harming the world" does not is not a legal stance for the company unless the harm itself is illegal or the entity is a Benefit Corp or similar.
I agree that investors may sue management for fraud or corruption. "Not maximizing profit" is neither fraudulent nor corrupt.
Investors who feel that profit is not being maximized can sell their shares or can vote to replace management. They can also buy sufficient shares from other unhappy shareholders to let them take control of the company altogether, and manage it themselves.
What evidence do you have that any shareholder has ever won a lawsuit against a company on the basis that the company was not maximizing profits?
It's true that investors can sell if profit isn't being maximized, but how often does that happen in privately held companies?
E.g. if startup X has the tech to take over a market, but is insufficiently pursuing a profit opportunity because of moral squeamishness, chances are relatively good that investors in X will simply replace the executives with somebody that will pursue those opportunities since that's vastly cheaper than building up competitive tech in a new investment.
Similarly with publicly traded companies, not pursuing profit opportunities can result in large sell offs of a stock. You see a lot of animus against short sellers that suggests that the "businesses must maximize profit" norm is thoroughly ingrained in investor communities even if it's not legally mandatory.
Do you agree, then, that there is no legal requirement for a company's management to maximize profits, and that you know of no cases where a shareholder prevailed in a lawsuit against management for failure to maximize profit?
Similarly with publicly traded companies, not pursuing profit opportunities can result in large sell offs of a stock.
That isn't obviously true. Eg, Amazon spent years actively doing everything possible to avoid making profits.
If investors don't like a company's strategy then they can try to get management changes or they can sell. But company strategy goes way beyond the blind pursuit of profit.
E.g. if startup X has the tech to take over a market, but is insufficiently pursuing a profit opportunity because of moral squeamishness, chances are relatively good that investors in X will simply replace the executives with somebody that will pursue those opportunities since that's vastly cheaper than building up competitive tech in a new investment.
That maybe true sometimes, but it is a lot rarer than you seem to believe (especially with early stage companies). The team running the company is a very large part of what people invest it. As a good counter example: Uber. Few would say that Travis wasn't pursuing profit every way possible, and it was the investors that moved against him because of his bad moral judgment.
With early stage companies, often what happens is investors subsidize an investment precisely because they know what the profit strategy is and because they think it's strong.
With Uber, Travis was attempting to undercut competition. Investors subsidize rides because when there is no competition they are in a better place to profit. Amazon (I believe?) was reinvesting the money in the business while subsidizing prices and package delivery to gain loyal customers. Many times an investor will subsidize a no-advertisement experience to gain an audience, and then switch on ads when the network effects are strong enough to retain the audience.
This is basically Machiavelli's advice that new princes should give favors to the masses when they rise to power, so that their positions are stronger later. But the real goal is always to turn profit aggressively, even if investors are patient for a few years while they maneuver into the right position.
Also just to be clear, no investor wants a business to pursue every profit opportunity. They want the business to focus on a strategy that will maximize profit given their strengths, and that always involves focus rather than being distracted by every possible opportunity.
"Legal standing" isn't quite the right phrase. I think you're saying the board does in fact have a legal duty to prioritize profit above all else?
If so, are you sure, and do you have sources? wool_gather said that "There's no categorical legal requirement for a company to make share value the absolute, #1 priority", despite a widespread belief to the contrary. And you seem to be just flatly contradicting him, without making any argument or providing any sources, which is... not the most helpful way of moving the conversation forward.
The investors have actions available to it than can punish executives for not pursuing profit opportunities sufficiently aggressively. Many of these don't involve the court, but some may.
Conversely, a founder that loses his/her business because investors punished them in this manner has no legal basis to fight to retain the business.
Well, your wikipedia link seems to confirm my layman's understanding of the term "standing", which is that it is about a party's right to participate in a court case. I am no closer to seeing how the English phrase "you aren't prioritizing profit" could "have standing". I think quadrangle is confused in his phrasing, if not in his underlying ideas.
Of course investors may do various things. But we're particularly interested in the question of whether the company must legally maximize profit, even if not directed to do so by a majority of shareholders. wool_gather says no, quadrangle says yes, I wonder whether quadrangle in fact knows what he's talking about.
You say "Many of these don't involve the court, but some may." But the "some may" is kind of what we're trying to get into: if you like, the question is "can a shareholder successfully sue the company for not maximizing profit, even if a majority of shareholders haven't directed it to do so?". As far as I know, that's equivalent to asking whether the company has a legal duty to maximize profit.
To have standing you need to show that you are an injured party. I believe the original commenter was saying that not attempting to maximize shareholder value is in some cases an injury that is sufficient for an investor to bring a suit. I don't know whether this is true or not, but I believe that's what they were thinking when they referred to standing. In the case of a fiduciary, investors do have recourse to legal action if the fiduciary fails to put your financial interests first.
In general, I agree that a company is not legally obligated to make a profit. For example, there are many little shell companies whose main goal is not to turn a profit but to do something else. There are also B Corporations that have special legal protections for investors pursuing goals that are not strictly financial.
So in that sense, wool_gather is correct. A company is not legally obligated to maximize profit. But as a practical matter, if you raise money from professional investors, the strength of agency theory and the norms of ordinary business suggest that you can get into legal or financial trouble if you don't put the financial interests of the investors over nearly all other interests.
> A company is not legally obligated to maximize profit.
Well, if we agree on that core point - which I think is all the point that wool_gather was trying to make - then that's great! And I think there's no point in the two of us investing any more time in picking over quadrangle's slightly confused reply.
I'm afraid I can't resist pulling on one more little thread, though :-) You've sort of hand-waved "legal or financial trouble" together, but it seems to me that legal consequences are very different from other consequences, in that there has to be a legal basis for legal consequences. "agency theory and the norms of ordinary business" can't condense and resolve themselves into a law: there either is a law on the books or there isn't.
I understand that shareholder lawsuits are a thing that can happen under some circumstances. But if the law doesn't make "not maximizing profit" sufficient grounds, then it doesn't, surely?
Well I think taken literally, "not maximizing profit" can't possibly be sufficient grounds for an action. Nobody really has any idea of whether any particular strategy is profit-maximizing, so it's hard to believe a company can be sued for not following a profit-maximizing strategy.
But shareholders can sue over alleged harm to a corporation. I'm not a lawyer, so I really have no idea what the standard is here. But purely speculatively, I suppose someone could be sued for repeatedly missing obvious profit opportunities because the executives objected to them on ethical or other grounds.
I get the impression, though, that shareholders are more likely to sue for committing an active blunder (like selling off a division for an insanely low price) rather than for missing an opportunity.
More charitably, I think what people like quadrangle are really meaning to say is that there is a significant legal framework that very strongly incentivizes and is inspired by the idea that the first obligation of a corporation is to maximize profit. And if that was the point, then I think that's pretty close to the truth.
Sure, you won't be arrested for not maximizing profit, but remaining in business without attempting to put profit first is sufficiently hard that it typically requires special legal protections (as in B corporations).
Ah, I finally begin to see what you mean. Sorry if I've been a bit boneheaded in this thread. I finally started googling instead of speculating, and I found this thread: https://www.reddit.com/r/law/comments/3pv8bh/is_it_really_tr...
which seems to confirm your ideas about the significance of benefit corporations. It looks like the key legal case happened surprisingly recently - 2010.
Apologies again: you were right and I was blinkeredly literal.
Thanks for the deeper back-and-forth. I did mean "standing" as brought out here. I.e. simply that failure to focus on profit can create a situation where investors can file a suit that won't just be thrown out.
I'm saying that there's enough legal premise around the idea that the business is working for profit. The investors buy stock with the premise that the business is aiming to provide a return. If they don't aim for that, they can be accused of not running the business in good faith or of misleading the investors…
I'm not saying there's an absolute legal imperative to maximize profit. I'm saying that investors are given enough legal tools in our bureaucratic world that they really can use the legal system along with other tools to bully companies into focusing on proift above other values.
A company just saying in court, "X would bring more profit, but that wouldn't be as good for the world" isn't going to get a suit dismissed if the suit is based on a bunch of complex legal allegations about the company misleading investors or I don't know what other wide range of possible legal arguments are available…
But for Benefit Corp or similar, investors would have less have legal standing to bring suits based on the companies following the social priorities laid out in their Benefit Corp bylaws etc.
Not, as far as I know, with any likelihood of success, no. There's a doctrine called the "Business Judgement Rule", which says that -- generally speaking -- boards/officers are not liable for bad stuff happening to the company as long as they act in good faith, without conflict of interest, and using their honest judgement of what is best for the company -- which doesn't mean the shareholders.
If they sacrifice what is "best for the company" in order to do better for the world, they can be accused by investors as not acting in good faith on the premise of pursuing business success etc.
You can always be fired for doing a ‘bad’ job, however your employer/shareholder defines bad. The law gives management really broad authority to define “good” and “bad,” though typically that’s easiest to measure and quantify through profit. (Especially for shareholders, who have alternative uses for money —- if the shareholder cares about Cause A, he has less to give to it if his investment underperforms.)
You can’t intentionally waste assets, you can’t put personal interests above the company’s interests, and there’s another set of rules when you sell the company — but “prioritizing profit” is an economic argument about what’s good and best, not quite so much a legal standard.
I mean, the point is that "you aren't prioritizing profit" has legal standing for investors. And "we don't prioritize profit in cases that involve harming the world" does not is not a legal stance for the company unless the harm itself is illegal or the entity is a Benefit Corp or similar.