To whom should corporate boards be responsible?

John Quiggin argues against the notion, popular at my alma mater, that a company's only duty is to maximize shareholder value.

So, presumably, the obligation to maximize profits is a matter of enlightened self-interest. Posner argues, plausibly enough, that a company that doesn't maximize profits is weakening itself in competition with other firms. To be more precise, the probability of bankruptcy or hostile takeover is presumably increased by deviations from profit maximization. But this doesn't mean that the probability of firm survival is maximized by maximizing profits. And there's no obvious reason why socially concerned managers couldn't conclude that the strategy that yielded them the best expected personal value, adjusted for the risk of corporate failure, was one in which the company pursued broad social goals.

Well, for starters, the managers aren't supposed to be maximizing their best expected personal value, which might well involve embezzling if they could get away with it.  They are supposed to maximize value for the people who hired them, i.e. the shareholders.  Now, one can hold arguments about whether the corporate board system has become dysfunctional, with CEOs manipulating the composition to give themselves excessively high pay.  But that would still be a violation of the board's responsibility to the owners--the other "stakeholders" have no just cause for complaint.  It is not enough to say that they have an interest in the outcome.  We make distinctions between positive and negative rights for good reason.  You have a very strong interest in the outcome of cancer research.  That does not give you any right to force cancer researchers to work on any terms you care to name.

But from a strictly economic perspective, this also misses the point.  Diminishing the fiduciary rights of shareholders raises the cost of capital to the firm, because it lowers their expected return.  America has extraordinary deep capital markets precisely because we reward shareholders for investing here.  Giving the "stakeholders" control over the process is a one-trick pony--you temporarily seize accumulated value for them, at the price of slowing capital accumulation, and hence productive investment, and hence growth, in the future.