Directors' Duties in a Post-Enron World: Why Language Matters

Abstract

This essay observes that, in the face of corporate scandals of the last few years, a number of prominent advocates for shareholder primacy have retreated to the position that directors and officers should attempt to maximize long run share value performance, rather than short term value. But the mantra of share value maximization has no distinctive meaning and policy implications if it is not interpreted to mean maximization of short term value. This is because the actions required to maximize share value in the long run are indistinguishable in practice from actions taken in pursuit of other more broadly-stated goals such as the maximization of wealth for all corporate stakeholders. Moreover, once its advocates accept the goal of long run share value maximization, then they should consider discarding the language of shareholder primacy, and the associated emphasis on high-powered, equity-based incentive systems. Such language is unnecessarily divisive and provocative. It draws attention to conflicting interests in corporate enterprises and announces that, when faced with conflicts, directors should choose actions that benefit shareholders even if those actions harm other stakeholders. In so doing, it tends to reduce cooperation, send signals that other participants and other values are of secondary importance, and undermine the ethical climate inside corporations. This essay proposes that, by contrast, the language of "team production" supports cooperative behavior, sharing of burdens and rewards, and win-win solutions.