Maximizing company value and fiduciary duties. Not so simple.

A lawsuit was introduced on October 3^rd 2022 against directors of Meta, (previously Facebook), adducing they breached their fiduciary duties and damaged interests of “diversified shareholders”, not in their stakes in the company, but because of alleged damages to the value of their other investments. This sounds very odd, but there is an argument. Let´s try to unravel the knot, following the Harvard Law School Forum on Corporate Governance, (1)

The complaint is based on the “shareholder primacy model”, (2) but considers not only the residual interest of common shareholders in the (maximum possible) cash flows and value to be received as common share owners, but beyond that, refers to the effect of board and directors´decisions on their other equity and debt investments, as institutional and even retail investors are generally diversified. The argument by McRitchie (the shareholder starting the procedure) refers to activities by Meta that entail political instability, damages to mental health overall and the rule of law, etc., thus endangering the value of their other investments, even if Meta value could be considered to be maximized, (all efforts by directors are guided to maximize revenue irrespective of these other public goods). The filing comes after some shareholders´proposals urging the board to consider these eventual damages were disregarded.

The filing does not consider actions by directors harmed stakeholders interests; it does not consider either that value in Meta shares was not maximized; it refers to shareholders other investments, (they are broadly diversified, as Institutional Investors -II onwards- own a majority of the market´s shares, over 75%).

The Shareholder Welfare Maximization Corpgov model. Can it work?

Oliver Hart and Luigi Zingales, (Harvard and Chicago) have just published an article (1) in which they promote the idea that Shareholder Value Maximization should be substituted by Shareholder Welfare Maximization as a corporate goal entailing fiduciary duties.

Their first point is examining the case for Shareholder Value Maximization: in a perfectly competitive market, an increase in the value of a firm favors shareholders whose budget restraint moves upwards, without altering other agents´ welfare as prices are not affected; so shareholders necessarily support the SVM model; the same appears to be the case if we consider the firm as a set of contracts that insulate contractors from production decisions: if a change is decided that increases shareholders´value, no stakeholder is negatively affected. Shareholders´value is the total and unique contribution of the firm to society, that is, if it dissappears, this is the value of all welfare lost.

The problems with SVM for Hart & Zingales. They see three major problems: