The MBA Oath, started at Harvard Business School, aspires to apply to business management a formal oath and code of ethics, similar to the Hippocratic Oath taken by medical doctors. While Professor Vermaelen places little value in the ability of oaths to change behavior, his primary objection is to the oath’s language, which asks MBAs to pledge, for example, to “contribute to the well-being of society” and to “create sustainable economic, social and environmental prosperity worldwide.”
These elements of the Oath sit at the core of social enterprise. Vermaelen, however, argues that they constitute a clear violation of fiduciary responsibility and ethical standards by asking future managers to potentially prioritize social and environmental concerns above the maximization of shareholder value.
The Legal Obligations of Today’s Business Leaders
In a post on the Low-profit Limited Liability Corporation (L3C), Jonathan Stray mentions in passing that the L3C model can help for-profit social enterprises avoid lawsuits resulting from not maximizing profit. But do such lawsuits actually occur? I can’t find evidence of them.
Shareholders often file suits, seeking class-action status, that try to punish directors and managers for acting in their own self-interest, misleading shareholders, failing to disclose important information, or otherwise behaving in ways that have clear and tangible negative impacts on the corporation (i.e. Intel allegedly failing to avoid anti-trust problems that have cost $2.7 billion). However, I don’t see where companies have been sued for not trying hard enough to maximize profit or not having profit maximization as their primary objective or purpose.
Nor does the legislative or legal documentation I’ve found support the idea that companies could be sued for such things.
The Articles of Incorporation of a company outline, among many other things, the purpose of the corporation. In most cases, though, these purpose statements are more or less limited to the language you find in Article III of Google’s Articles of Incorporation (posted online!), which states that the company can engage in any lawful activity for which corporations are authorized in that state.
The laws in my own backyard, the State of Minnesota, point in a similar direction. Statutes here addressing “Business Corporations” (C-corporations) cite no requirement that companies maximize profits. Rather they speak only to the Standards of Conduct for directors and officers. For directors, these standards read as follows:
“A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”
In Minnesota, the statute even goes on to explicitly state:
“…a director may, in considering the best interests of the corporation, consider the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as short-term interests of the corporation and its shareholders including the possibility that these interests may be best served by the continued independence of the corporation.”
What’s remarkable about this verbiage is that it very closely approximates the recommended legal language to use when establishing a B Corporation, a “corporation which uses the power of business to solve social and environmental problems.” In effect, in states like Minnesota all companies seem to have, by default, the explicit right to pursue ends other than profit maximization as narrowly defined.
Profit Maximization: Undefined
The absence of profit maximization language that my legal search yielded seems to tie back to the fact that it is perhaps impossible to judge whether behavior qualifies as profit maximizing. A great post by Daniel Davies at Crooked Timber very elegantly outlines how not only personal subjectivity but also uncertainty regarding the future and one’s time horizons make judging profit maximization impossible.
For example, it may be great for this quarter’s revenues to take advantage of customers and degrade the environment, but a CEO with a longer-term perspective is likely going to recognize the eventual financial consequences of such behavior. Likewise, donating a portion of profits to local charities might be considered profit-killing in the short term, but the resulting goodwill the company establishes can have positive long-term financial impacts.
Indeed, because what constitutes “profit maximizing” is so impossible to define, American case law has developed concepts such as the Business Judgment Rule to help prevent courts from questioning ex post the wisdom of well-intentioned business decisions made by managers and directors.
It’s fairly safe to say that, at least in the United States, there is absolutely nothing legally forcing managers to maximize profits (for more see this paper on Dodge v Ford).
Business Ethics and the Social Contract
That means that the only thing compelling managers to put profits first is us. It’s not legal obligation but the social contract – the expectations created as result of push-pull dynamics between shareholders and managers – that dictates whether social enterprise is ethically acceptable. A company can be profit-maximizing or social impact-maximizing. What matters is that they’re transparent about what they choose.
To his credit, Professor Vermaelen ultimately says the same thing. However, he assumes that shareholders will be profit-maximizing in their orientations and run as far away as possible from social enterprises as we know them. Of course, if this has ever been true, we know it is increasingly changing.
One remarkable test of the power of the implicit social contract relative to the profit-maximization assumption will be the recently-filed lawsuit against Cadbury.
Cadbury has been sued by shareholders who are upset that the company did not accept a sizable takeover bid by Kraft. As part of his defense, Cadbury CEO Stitzer will be emphasizing the value of the company’s unique culture and Quaker heritage and ethos. Pointing to evidence like the success of Cadbury’s fair trade Dairy Milk chocolate bars, he will defend the right of the corporation to stay independent or accept a lower offer from a culturally similar firm like Hershey’s.
Keep an eye on this one. It will say a lot about the long-term future of social enterprise.
Social Intrapreneurship and Taking the Oath
All in all, it seems there is only one level at which Professor Vermaelen’s warnings really make sense; that is, at the individual and intrapreneurial level. If I take the MBA Oath but later take on a management role at a company that asks me to show little regard for social or environmental impact, then, yes, I’m behaving in ethically questionable ways. Likewise, a hiring manager at a socially or environmentally careless company might want to think twice about hiring me if I have taken the MBA Oath.
For some reason, though, I expect that these violations of ethics will be few and far between. Those inclined to take the MBA Oath will be running as far away as possible from these unsustainable companies, in search of greener pastures – not the other way around.