What law, exactly, is it that requires corporations to maximize profits?

[aenedleah10]

This topic comes up every once in a while in op-ed pages, business articles, social commentary, but there is never any citation of which law, where, or if it's a Federal requirement for incorporation - whatever. Can anybody shed some light on this for me, and others, please?

[alleyne]

none.

of course, the shareholders have the right to change managers if they dislike the outcomes or for any or even no reason -- including failure to make use of profit opportunities. ergo, managers try to take maximum prudent advantage of opportunities lest they lose their jobs [and deservedly so].

[advent]

I don't think it's a law as much as a general principle and practical reality. A board of directors can direct in any way they choose, but they are elected by the stockholders. If a company has a long-standing reputation for doing the expensive but responsible thing, that company would probably attract investors who don't mind spending more on responsibility. Absent that kind of reputation, what is a CEO's job according to his investors? To run the company in a way that is profitable, and will therefore increase the value of their stock. Unless the stockholders collectively decide (imagine how impossible this would be if they did agree, and how unlikely it is that they would...) that something other than the value of their stock is more important to them and the company should be run greener, more American, or in a less predatory way, then the CEO and Board are going to figure that if the stock goes up they keep their jobs.

This is one of the big problems with the whole principle of "corporations". We make a company into a fiction that is legally a person, but that fictional person has no morals, no possibility of jail time, no family to feed, can get out of debt simply by dissolving itself, and doesn't care in the slightest about the children of tomorrow. Then we expect corporations playing without rules to live in the world with real people. Some of those people will have morals that could put them at a competitive disadvantage. If those people fail, they don't get to go 'oops, bankrupt, guess I'll change my name and start over'. And worst of all, some people will see amoral corporations in the business world and will feel that the best way to compete is to lose their own morality. It used to be that walking away from a mortgage debt when you are able to pay made you a low-life--you promised to pay, you can pay, but you won't pay, therefore you can't be trusted. Nowadays that's just financial strategy--and since the banks are allowed to do it, why shouldn't I be able to? While I agree that people should be able to do what the banks and other corporations do, I think that the morality and responsibility bar should be raised for corporations, not lowered for real people.

[vaiveatoish]

It could be argued that the common law fiduciary duties, like that of loyalty, would require leaders of corporations to maximize profits - assuming the corporation is a publicly-held one or a privately-held one who's objective is profiteering.

The fiduciary duties essentially require the corporate actor to put the interests of the corporation above all else. The interests of the corporation will vary, though, depending on the corporation. Many would hold that maximizing profits is its best interest.

[cumhea]

to the Best of my Knowledge,there is no such law. Who Could "write" it. NowI am sure there is some un-written law that Board Rooms across the Corporate Lanscape have made that put quite simply, states;" No Maximization of Profits means no "Job!"