parent nodes: business judgment | corporation form | corporation law | directors | fiduciary duty | limited liability
purpose of corporation
"A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to to a change in the end itself. . ." [Dodge v Ford Motor Co]. The directors owe a standard of care to the shareholders to maximize profit. However, within these limits, courts will not generally question directors' business judgment, even if in the directors' judgment profit must be forgone or charitable contributions must be made in order to pursue the corporation's aims. [Shlensky v Wrigley] (refusing damages against Cubs for not building lights on home games, in part on theory that for example if night lights were to reduce the quality of Wrigleyville fans would be less likely to attend those games and Wrigley Field's real estate value might decline). Courts often expect some sort of rationale for how a charitable contribution might benefit the corporation, but do not inquire deeply into just how plausible that rationale is. Likewise, the size of the charitable contribution usually has no impact on whether courts will approve.
Note also that state statutes may explicitly authorize corporations to make contributions, sometimes even anonymously. See, for example [AP Smith Mfg Co v Barlow].
Note that despite the liberal rules about the purpose of corporations and the business judgment rule, corporations are going to be constrained anyway by the labor, product, and capital markets, which will restrain corporations' access to these factors if their actions are too far afield. Cf Posner, EAL (arguing that case law on the purpose of corporations is unimportant, because firms that maximize anything but profits will fail). There may also be some value in letting the board work as a collegial institution, while judicial review of board actions may undermine that collegiality.
The concept of 'shareholder value' is misleading, since there is no clear way to pick at what point in time shareholder value should be maximized, at what level of risk (and return) the firm should pursue on behalf of its shareholders, what group of shareholders (who change frequently) deserve value maximization, or whether the shareholders have idiosyncratic preferences. Courts claim to be unable to determine ex post what a business should have done ex ante; note, however, that courts show no such hesitation in other negligence, contract, or especially products liability cases. Investors also cannot easily opt out of a fiduciary duty once it is put in place.
Note that charitable donations are going to be relatively smaller, and more like day-to-day business decisions, than larger, investment-type decisions such as mergers. With larger amounts of money, and with more effects on a corporation's investment strategy, individual shareholders will have higher incentive to collect information. (Note especially that with publicly held, large corporations, the largest shareholders are likely to be institutional shareholders such as banks, etc., who thus have a large incentive to generate information). Larger shareholders can thus act as entrepeneurs that can overcome the [collective action problem] that individual shareholders face as far as monitoring a corporation's larger decisions.
Note also the risk of decision costs arising from class actions against charitable donations; a plaintiff's lawyer could thus take a large fraction of a class judgment where each individual shareholder loses very little (and who can easily exit by selling their shares if they disagree with the donation). Additionally, product markets, labor markets, and capital markets all constrain the risk of excessive donations.
Note also the existence of permissive 'other constituency' statutes allowing corporations to consider the objectives of other groups and other concerns (the environment, workers, etc.); while the statutes are permissive and thus don't require corporations to do anything, they may allow some directors to voice preferences for favoring other constituencies that they might not have otherwise considered.
See generally Baird and Henderson, "Other People's Money" (arguing against the concept of fiduciary duty in favor of a rule that directors must adopt the course that, in their judgment, maximizes the value of the firm as a whole, coupled with a strong business judgment rule
[AP Smith Mfg Co v Barlow] (applying statute allowing limited charitable donations by corporations to a corporation incorporated before the statute, thus allowing the corporation to donate money to Princeton)
[Dodge v Ford Motor Co] (requiring Ford to use profits it had intended to reinvest in its plants to pay out special dividends as it had before, while refusing to enjoin Ford from actually building those plants by borrowing or otherwise; note that the other shareholders wanted the dividend so that they could start a rival car company themselves)
[Shlensky v Wrigley] (refusing damages against Cubs for refusing to build lights for night games, on the grounds that there was no fraud, illegality, or conflict of interest in its business decision not to do so)